1. Political Environment
■ Structure of China’s Top Leadership
China follows a system where the Communist Party leads all aspects of governance. Top leaders of the country, senior officials in the central government and military, and provincial governors are all appointed by the Central Committee of the Communist Party.
■ Xi Jinping’s Third Term and Focus on Risk Control and Stability
With Xi Jinping entering his third term, the government is expected to prioritize risk management and stable, balanced growth over aggressive, efficiency-driven expansion. The emphasis will shift toward income distribution and economic stability.
2. Economic Environment
■ Economic Growth Driven by Advanced Industries, Investment, and Consumption
• Production:
Following a spike from base effects, overall industrial growth is slowing, but high-tech manufacturing is expanding rapidly.
- Total industrial output in the first half of the year rose 15.9% YoY, though traditional manufacturing sectors saw declines.
- Sectors sensitive to raw material prices—steel, machinery, and automotive—experienced negative growth.
- High-tech manufacturing grew 22.6% YoY, exceeding the two-year average of 13.2%.
- New energy vehicles (+205.0%), industrial robots (+69.8%), semiconductors (+48.1%), medical devices (+34.2%).
• Consumption:
While consumption is gradually recovering, growth is moderate.
- Consumption rose 23.0% in the first half but the pace is decelerating.
- Online consumption slightly slowed as COVID-related restrictions eased.
- Government efforts to boost domestic demand drove strong consumption in new energy vehicles, dining, and tourism.
- Stable factors included improved pandemic control and spending during holidays like Labor Day and Dragon Boat Festival.
• Investment:
Manufacturing investment remains strong, but infrastructure investment is weak.
- Compared to manufacturing (+19.2%), real estate (+15.0%) and infrastructure (+7.8%) lagged.
- Investment surged in high-tech manufacturing (+27.1%) and medical-biotech equipment (+34.9%).
• Exports:
The contribution of exports to economic growth continues to decline.
- As major countries increased vaccination rates and stockpiled intermediate and capital goods, exports began to slow in the second half of 2021.
- As exports weakened, the share of final consumption in GDP steadily increased.
• Uneven Recovery in Consumption Patterns:
While face-to-face services and offline retail continue to struggle post-COVID, goods-related and online channels remain relatively strong.
3. Industrial Environment
■ (Growth Drivers) Transition from Traditional Manufacturing to Services and High-Tech Industries
China’s industrial growth is rapidly shifting from traditional manufacturing to high-tech and service sectors, backed by a massive domestic market, a complete industrial ecosystem, and strong government support.
- In 2019, services contributed over 60% to economic growth. Despite COVID-19 setbacks in 2020, the sector still accounted for 47.3%.
- Services now make up more than 50% of GDP.
- As of 2020: Primary industry 7.7%, secondary industry 37.8%, tertiary (services) 54.5%.
- Despite COVID-related disruptions, the share of services in GDP continues to grow.
■ Rapid Growth in Emerging Strategic Industries
- Thanks to focused government investment, emerging strategic sectors have doubled in size over five years and now account for 15% of China’s GDP (as of 2020).
■ (Digital Transformation) Rapid Shift Toward a Digital Economy
- With aggressive government support and infrastructure expansion, the digital economy is growing quickly, accounting for nearly 40% of GDP by 2020.
- High energy-consuming sectors such as steel, cement, and coal are subject to stricter regulations, including the carbon trading system and production curbs.
■ (Supply Shortages) Managing Risks from Power Shortages and Raw Material Price Spikes
- Global recovery and carbon neutrality trends are causing ongoing raw material shortages.
- While government measures have moderated the price hikes, elevated levels are likely to persist.
- China’s power shortages are unlikely to be resolved in the short term.
- Coal output was increased and electricity prices raised in Q4 2021 to address shortages.
- However, as coal still accounts for over 60% of China’s energy consumption, short-term fixes are insufficient.
- Long-term structural change in the energy mix is critical to achieving carbon neutrality by 2060.
■ Winners and Losers by Sector amid Digitalization, Carbon Neutrality, and Supply Stability
- Digital transformation and carbon neutrality initiatives are accelerating the restructuring of high energy-consuming industries and boosting eco-friendly sectors.
- Supply-related challenges such as power shortages and rising raw material costs will create mixed outcomes across industries.
4. Policy and Regulatory Environment
■ (Industrial Policy) Focus on Fostering the “Four New Economies” and High-End Manufacturing
To secure future growth, China is emphasizing self-reliance and digital transformation:
- (Self-reliant supply chains): Expect comprehensive support—project funding, tax breaks, financial aid, public procurement, support for innovative products and high-tech commercialization.
- (Digital economy): China aims to fully digitize all major manufacturing enterprises (over ¥20 billion annual revenue) by 2035.
- The focus will be on seven key industries including cloud computing, big data, and the Internet of Things (IoT).
■ (Enterprise Development) Tightening Market Order While Promoting “Little Giants” and Hidden Champions
- (Market regulation): Strict enforcement against monopolies and unfair practices will continue.
- China’s regulatory focus is shifting to strengthening innovation and tightening oversight on data security, internet markets, and anti-monopoly measures.
- Ongoing crackdowns on unfair competition and monopolistic behavior are expected.
- (SME cultivation): Strong support for small and specialized firms with a focus on professionalism, precision, uniqueness, and innovation.
- Policy is moving away from favoring large corporations to nurturing competitive small firms.
- By 2025, the goal is to foster 1 million innovative SMEs, 100,000 provincial-level “specialized and innovative” SMEs, 10,000 “little giants,” and 1,000 champion enterprises.
■ (Environmental Policy) Structural Reform of Polluting Industries Driven by Green Growth Strategy
- Carbon trading schemes and administrative measures such as ongoing inspections and production curbs will likely intensify.
- China is expected to push forward its green agenda, accelerating the restructuring of heavily polluting industries.