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China outlook – Some unconventional thoughts

While there appears to be a large degree of market consensus on China’s GDP growth in 2022, there is less clarity on the three to five-year outlook. A raft of issues could slow growth momentum in 2022. They range from a high base effect from 2021, slowing export growth, further regulatory reform and the country’s ‘zero-Covid’ policy to carbon emissions control and a cooling property market. There is also a lack of ‘animal spirits’ to spur private investment due to policy uncertainty.  


This article appeared in the 2022 Investment Outlook by BNP Paribas Asset Management.


Avoiding unhelpful policy signals

Cautious tweaks to macroeconomic policy would only partly offset these headwinds. Beijing’s tolerance for slower growth appears to have grown as it accepts that this is a price that must be paid when prioritising debt reduction, cutting carbon emissions and implementing further reforms.

For 2022, management of the economy looks set to focus more on resolving structural problems and supply-side disruption, notably power shortages, surging energy prices and producer price inflation.

Given these objectives, the People’s Bank of China is highly unlikely to open the monetary floodgates as it will be keen to avoid sending out policy easing signals that could fuel inflation and derail the government’s debt reduction and ‘Go Green’ efforts.

Structural considerations in the growth debate

Conventional wisdom argues that China’s annual GDP growth would fall to 4%-5% in the next three to five years. However, the market may have overlooked the impact on the outlook of the return of industrialisation alongside structural changes.

The manufacturing sector has regained policy favour under Beijing’s new reform tactics. These favour high-value manufacturing and hard tech production over traditional manufacturing and soft tech investments. Hard tech refers to the production of hardware and components that cater for the country’s strategic and high-tech development; soft tech refers to the development of e-commerce catering for non-strategic consumption demand.

China’s domestic sector started a slow rebalancing in 2005. This involved reducing costs and improving infrastructure to drive industrialisation towards poor inland provinces. The strategy resulted in a regional division of labour. The expensive eastern region moved from manufacturing to high value-added services industries; cheaper inland regions picked up low value-added manufacturing.

However, the migration process has reversed since 2013 (see Exhibit 1) when Beijing refocused the drivers of economic growth on services and consumption. This led to a rise in the tertiary sector’s share of GDP at the expense of the secondary sector. Overall GDP growth slowed, reflecting Beijing’s policy at the time to trade off a slower GDP growth rate against higher growth quality.

Now, industrial migration to the interior provinces is likely to resume, with high-value-added industries dominating. The government’s efforts to achieve carbon neutrality by 2060 are set to open up new growth sectors and investment opportunities to replace the ‘sunset’ sectors.

Investment opportunities in new industries

China needs to upgrade its electricity grid and develop energy storage systems to improve energy supply and distribution. It also needs to wind down fossil fuel consumption by using more green electricity and achieve a structural shift from energy-intensive heavy industry to high value-added segments to boost energy efficiency.

New-sector investments are estimated to amount to RMB 5 trillion (USD 781 billion) a year – about 10% of China’s annual total fixed asset investment – over the next decade. [1]

Mobilising private capital is crucial to support investment in the ‘Go Green’ areas. Together with hard tech development, this should revive China’s GDP growth and raise the country’s medium-term productivity.

Time will tell how well these trends evolve, but they already provide useful food for thought when assessing China’s outlook and thus how investors can best position their 2022 investment strategies.

[1]  “China’s new growth driver”, HSBC Global Research). Decarbonisation can drive mainland China’s growth | Insights | HSBC 


Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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