Multiple challenges affected China’s economy in 2022, including a COVID-19 resurgence in the fall, a weak property sector due to a correction in the housing market, high youth unemployment, and sluggish consumption recovery. China abruptly reversed its zero-COVID-19 policy at the end of 2022, a decision probably based on CCP leader’s recognition that the lock downs were failing to prevent infections and concerns about the fluffing economy and country-wide protests against the policy in early December. China is also facing adverse demographics, slowing external demand amid global inflationary pressures, and a debt problem. Although global supply chain relocation has been discussed for years, multinational corporations may be thinking more seriously about supply chain diversification after facing serious disruptions during China’s zero-COVID-19 policy.
China’s government is also concerned about economic risks associated with prolonged housing market corrections and may be more inclined to deliver funding support for developers and further easing measures on the demand side (e.g., lower down payments required and the removal of home purchase restrictions). China’s property market may have reached a trough in 2022 and could improve in 2023.
Economic Policies and Practices. The 20th Party Congress unveiled a new economic leadership team to advance Xi’s goal of rejuvenation of the Chinese nation on all fronts. Economic growth is a necessary condition for China to realize this goal, with more emphasis on quality and inclusive growth, as well as security requirements. The Party Congress vowed to grow China’s per capita GDP to be on par with that of a mid-level developed country, which it defined as income of $20,000 per capita. This would imply average growth of approximately 3.5 percent during 2022 to 2035. Xi’s new economic team has broad technocratic qualifications. Of note, Xi elevated Vice Premier Zhang Guoqing to be in charge of science, technology, and industry. Zhang has a doctorate in economics, which suggests a national security-oriented economic focus in Xi’s third term to supports his stated goal of national strength through increasing economic strength and scientific technological capabilities.
The PRC’s introduction of market economy features within the “basic economic system” without a full transition to free and open markets has resulted in laws, regulations, and policies that generally disadvantage foreign firms vis- à-vis their Chinese counterparts in terms of tradable goods, services sectors, market access, and foreign direct investment. Examples of China’s economic policies and trade practices include its support to domestic industries at the expense of foreign counterparts, commercial joint venture requirements, technology transfer requirements, subsidies to lower the cost of inputs, sustaining excess capacity in multiple industries, sector-specific limits on foreign direct investment, including partnership requirements and other barriers to investment, discriminatory cybersecurity and data transfer rules, insufficient intellectual property rights enforcement, inadequate transparency, and lack of market access—particularly in the information and communications technology (ICT), agriculture, and service sectors. Market access remains difficult for some foreign firms because China restricts certain inbound investment, resulting in persistent underperformance in other countries’ services exports, particularly in the banking, insurance, Internet-related, professional, and retail services sectors.
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OFFICE OF THE SECRETARY OF DEFENSE
Annual Report to Congress: Military and Security Developments Involving the People's Republic of China
