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The two sessions: Do not rock the boat in the middle of a storm

By Bjoern Conrad, Tiffany Wong and Ban Yin

It seems like an impossible task. This year, with the all-important 20th Party Congress approaching, it is crucial for the “Two Sessions” to convey a sense of calm and stability, reassuring the country that China is on a clear course into the future. There could hardly be a more difficult time to achieve this goal. Domestically, China’s government is facing the challenges of its strict No-COVID policy. Abroad, China’s leadership is trying to balance its conflicting interests in the war in Ukraine, resulting in a meandering positioning. Not ideal circumstances for conveying confidence and serenity. 

However, the National People’s Congress (NPC) session is the ideal occasion to communicate stability in times of uncertainty. The NPC with its ritualistic, precisely scripted procedures, is never meant to controversially debate urgent issues or to produce tough crisis decisions. The NPC is the ideal setting to push current turbulences into the background and instead focus on reaffirming the leadership’s long-term plan for steering China into the future.  

Three priorities in light of the ‘Two Sessions‘ 

While the “Two Sessions” will not bring major policy shifts, the NPC still provides a window into the leadership’s political priorities, perception of challenges and recipes for addressing these challenges. Here are three of the most important questions, this year’s NPC is raising: 

How to get to 5.5%? The annual growth target, as traditionally announced during the Premier’s presentation of the “Work Report”, is the number that always makes it into global news. This year, the number is “around 5.5%”. Down from last year’s “over 6%”. But still, an ambitious target in times of uncertainty. It sends a signal: Despite unfavorable conditions, China’s leadership is confident to defend the growth China needs to stay its course. 

However, China’s leadership has a sober view of the pressures that weigh on China’s economy. The NDRC spells them out as a supplement to the Premier’s work report: 1. shrinking demand in consumption and investment; 2. shortage of production inputs (coal, chips); 3. producer price inflation; 4. risks in real estate, small banks, and regional government debts; 5. low confidence of small businesses and individuals towards market prospects. 

These challenges make the 5.5% growth target more impressive, but less convincing. It seems likely that securing the target means compromising in other policy areas. Two of the areas to probably act as safety valves, creating short term growth as necessary, are China’s decarbonization agenda and the real estate sector. In both sectors, signals point towards a relaxation of the government’s course in favor of growth. 

In 2021, the Central Economic Work Conference showed a shift in rhetoric on decarbonization. The new emphasis was on balancing the CO2 emission reductions against supply chain security and, thus, economic growth. Specifically, this pointed to the slowdown of phasing out coal, compensated by a delay in the transition to renewable energy.  

In the real state sector, regulators have abandoned strict restrictions over real estate credit, asking banks and local governments to meet housing needs of consumers. The idea of property tax trials is missing in the governmental work report. Reducing the Chinese economy’s reliance on real estate apparently has to take a back seat when it comes to defending the short-term growth targets. 

Balancing act between regulation and market innovation

How to build a digital economy? Building a digital economy and tapping into data as a growth driver of the future is one of the most forward-looking themes of this year’s “Two Sessions.” Last year, China’s vision of the digital economy underwent a shift. 2021 saw a dramatic showdown in China’s tech sector, intensifying the regulators’ grip on previously largely unchecked digital and technological growth. Going forward, the state now plans to take a more active steering role, redirecting China’s innovative tech as a means to push industries up the value chain. 

China’s policymakers acknowledge that it will be a long path for China’s companies to reach digitalization goals. A 2020 assessment found that only 5% of companies leverage digital knowledge for manufacturing optimization. The government response is the recent 14th Five-Year-Plan on Informatization, providing a blueprint for accelerating digitalization and setting the ambitious goal for added value of China’s digital economy to reach 10% of the country’s GDP by 2025.  

As China’s vision of its digital economy shifts from facilitating consumption to accelerating digital industries, data will be treated as the key strategic resource. The protection of such a resource is crucial. The “Two Sessions” report mentions national security and cybersecurity in the same breath. It is not a coincidence that 2021 was the year the country saw the enactment of two landmark cyber-related laws, the Data Security Law and the Personal Information Protection Law. Together with the 2017 Cybersecurity Law, they form a three-pronged framework to protect the data most vital to the state.  

As China prepares the ground for a massive expansion of its digital economy, the government will have to perform the balancing act between state regulation and market innovation. Data protection enforcement will increase as the state continues to build the regulatory architecture to support a burgeoning digital market. The “Two Sessions” underline: China is currently writing the first chapter of a new playbook on its own version of a digital economy. 

Social stability under considerable pressure

How to secure social stability? At a time of slowed economy and geopolitical uncertainty, social security in China is under significant strain. As one People’s Daily article puts it, “people’s livelihood is the biggest politics”.  

Stabilizing employment is the most imminent challenge. The work report promises to create more than eleven million new urban jobs. For the ten million college graduates in 2022, this means expanded employment channels, relaxed urban settlement policy and more incentives for entrepreneurship, especially in high-tech areas including big data, cloud computing and semiconductors. The report also vows to invest one trillion RMB into training a skilled labor force for “high-quality manufacturing” development.  

Equal access to public services is another key focus, especially in the context of regional population imbalance and economic disparity.  A few months ago, NDRC published the 14th FYP for Public Services, drawing binding targets on elderly care, childcare, primary education, healthcare and housing by 2025. The government work report supplemented it by calling to extend municipal-level public services to counties and below through more coordinated regional development. Despite not mentioning any new specific measures on “Common Prosperity”, NDRC hinted in its report that an overarching plan is underway. Equalizing public services and improving regional coordination will likely be a key part of it.  

As the relaxation of the One-Child Policy failed to initiate a demographic turn around, China’s pension system – with heavy reliance on the government and corporate annuity – will come under increasing pressure. The “Two Sessions” report highlights two acknowledged solutions: developing the third pillar – individual pension plan – and more efficient fund management through a unified national pension system. While the solutions are clear, it is yet to be observed whether the actions can catch up with the growing financial burden of a fast-aging society.  

All the proposed initiatives to improve China’s social policies have a common denominator: massive government spending. And here the circle closes: To keep the promises on employment, social welfare and equality, China needs the envisioned 5.5% economic growth. 

Staying the course: Enough to get through today’s troubled waters? 

Even, or especially when the world is turned on its head, the “Two Sessions” are not the place for drastic shifts in political strategy. Instead, the 2022 “Two Sessions” are a demonstration of staying the course, not being distracted by the turbulences all around and stoically pushing ahead with the leadership’s plan for the future. However, behind the curtain, China’s top leadership will ask itself the question, if more dramatic course corrections are ultimately needed to steer China through today’s troubled waters. The answer will have to wait until the main event, the 20th Party Congress. 

Bjoern Conrad is the CEO and Co-Founder of Sinolytics and an expert on China’s economic, industrial and technology policies. Tiffany Wong is a project leader and an expert on cyber, digital policy. Bin Yan is a Project Leader and expert on China’s economic policy and financial sector. Sinolytics is a European research-based consultancy entirely focused on China. It advises European companies on strategic orientation and specific business activities in the People’s Republic.

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