2021 proves outstanding for China, 2022 will focus on stability and prudence

Despite the negative economic impact of the COVID pandemic worldwide, China registered an outstanding year in 2021. While the country’s economic growth slowed down, the overall economic recovery was stable. According to the Chinese government, the focus for 2022 will be financial stability and prudence.

Experts agree that there will be several internal and external variables to account for in the new year, given that the COVID pandemic is still affecting international markets and supply chains, and the tensions between China and the United States haven’t been resolved.

Foreign companies with a business presence in China should continue to monitor economic developments closely in 2022, as well as policy changes and the implementation of new rules and regulations such as the new data and cybersecurity laws.

Technological self-sufficiency and innovation, as well as green development, remain a core priority of the Chinese government moving forward.

China’s full-year GDP growth is expected to reach 8.0 percent in 2021 (IMF forecast in October), down 0.1 percentage points from the forecast in July.

According to analysts, the Chinese government could continue its fine-tuning policy, maintaining a stable monetary policy while keeping liquidity reasonable and providing targeted fiscal support for small and midsize businesses to encourage short-term growth and advance long-term reforms.

In 2021, a series of new laws were approved, introducing certain compliance risks but also opportunities. Foreign businesses should be aware of sudden changes to the market as the government adjusts its socioeconomic policy priorities.

Last year, the Chinese government tightened data security regulation, clamped down on monopoly and anti-competitive practices, and enforced dramatic education reforms, among other things. Foreign companies should follow these events closely to understand the nature of the trends that will affect the business world in 2022.

2021 was an eventful year, during which China began the 14th Five-Year Plan (2021-2025), and the Communist Party celebrated its one hundredth anniversary in July and discussed the future of the country’s next leadership.

On January 1st, China’s first ever Civil Code was implemented, followed by a series of new laws, among them the Data Security Law (DSL) and the Personal Information Protection Law (PIPL), which regulate cross-border data flows and personal information.

The government abolished the illegal “996” work policy and improved workers benefits. Under the pressure of a growing demographic imbalance, China’s legislature amended the Population and Family Planning Law, which eventually eliminated long-standing birth control measures and legalized the three-child policy.

The education industry was also the center of radical reforms, which banned all private profit-making businesses from teaching compulsory education subjects.

As part of the campaign to narrow the growing wealth gap and promote “common prosperity”, the National People’s Congress (NPC) authorized the State Council to implement a pilot property tax scheme in select regions. The government has long wanted to break the vicious circle of property speculation and credit expansion.

On the international stage, after US president Joe Biden took office, the tensions between both countries intensified, especially in the technological, financial, and military areas.

Despite the two country’s leaders agreeing to “guardrails” around their bilateral relationship in a virtual meeting in November, the US continues to blacklist Chinese quantum computing and semiconductor entities.

One of China’s main objectives is developing its technology capacity to solidify its place in the financial world, a move that will inevitably clash against US interests. In November, a new Beijing Stock Exchange was launched to channel finance to small and mid-sized innovative firms.

Climate change is one of the fields, where both countries could join forces. During the final days of the COP26 summit, the US and China made a surprising joint declaration to work together on climate issues.

In September, Chinese President Xi Jinping said China would stop supporting new coal-power projects overseas. To achieve the net zero carbon emission target, China is expected to roll out more policies to regulate polluting commodity industries, transportation pollution, and household waste.

Among the major developments from last year that will impact businesses in China in 2022, data regulations are the most important. In the second half of the year, China introduced several laws tightening control over data: the Data Security Law (DSL) and the Personal Information Protection Law (PIPL), as well as Regulations on the Security and Protection of Critical Information Infrastructure (CII), based on the Cybersecurity Law (CSL), from 2017.

The DSL, which came into effect September 1, 2021, stipulates how data is used, collected, developed, and protected in China. It emphasizes on top-down coordination of data security implementation among governments and differentiated fines based on severity of violations.

The DSL as well as some other regulations state that transferring “important data” overseas is subject to a government review. While the law does not elaborate on what constitutes “important data”, it requires government departments to formulate the catalogue of “important data”.

The PIPL, effective since November 1, 2021, tightens scrutiny of personal information collection and use, and sets strict rules on how companies should handle this type of data. Personal information collected or generated within the territory of China is required to be stored within China. If it’s necessary to provide the data overseas, the firm must undergo a security review.

Both laws stipulate fines for violations. For violating the PIPL, organizations could face the maximum penalties of RMB 50 million (US$7.8 million) or 5 percent of revenue and for individuals, they could be liable up to RMB 1 million’s fine (US$156,700).

The three laws – the CSL, DSL, and PIPL– altogether form the legal framework for cyberspace governance, information security, and data (privacy) protection in China.

Regarding anti-competitive practices, China issued several multimillion fines. Alibaba had to pay a record RMB 18 billion (US$2.77 billion). In addition, the fintech giant Ant Group was asked for a rectification, including its risky lending practices and enhance data privacy protection.

Other internet conglomerates including Tencent, Baidu, ByteDance, and Didi Chuxing were also punished for violating the anti-monopoly law. Smaller internet firms, including foreign-invested enterprises, were also targeted. In April, an English-language takeout platform Sherpas was fined US$178,000 by Shanghai market regulator for anti-competitive conduct.

As part of the anti-monopoly campaign, China reenforced the Antitrust Law and created a new antitrust bureau last November, responsible for conducting investigations and oversight into M&A activities and market competition.

In the educational field, China instituted reforms to its system, including bans on for-profit tutoring in core education, the cancellation of written exams in the first and second grades, as well as the roll-out of China’s first Family Education Promotion Law (effective January 1, 2022).

The reforms deeply impacted China’s tutoring industry, where many tutoring institutions went bankrupt and substantial consumer demand remains.

Despite the government’s restrictions on foreign investment in academic tutoring for school-age students and increased scrutiny of foreign teachers and imported education materials, business opportunities still exist.  The Chinese government is simultaneously promoting private investment in areas such as vocational education to improve the country’s workforce.

Last August, China limited the amount of time children can spend on video games to avoid gaming addiction and its impact on children’s academic and personal development. This measure had a dramatic effect on the world’s largest online gaming market.

Meanwhile, the National Press and Publication Administration has not published a list of approved new games since the end of July.

Regarding global warming, in September 2020, Xi Jinping pledged that China would hit carbon emission peak before 2030 and become carbon neutral before 2060. Industries like coal, petrochemical, chemical, steel, non-ferrous metal smelting, construction, and transportation, will face new compliance risks. However, over the next decade, there will be new opportunities in green and low-carbon energy, green and low-carbon technology, and circular economy.

In July, China launched the world’s largest carbon trading market in Shanghai to cut carbon emission growth. At launch, the carbon market covers over 2,225 companies that operate coal and gas plants to produce power and heat, but policymakers plan on expanding the scope of the carbon market to include other polluting industries, such as steel, cement, chemicals, and aviation.

Achieving these carbon goals will cost an estimated RMB 140 trillion (US$22.4 trillion) over the next thirty years.

The government’s strategy is actively promoting green finance – a set of policies and incentives to channel private sector capital, primarily through loans and bonds, into green projects and industries. It is also adopting different tools, including making it more attractive to banks.

In addition, the government is considering ‘green credit’ and ‘green trade’. China is also looking to align green finance standards with international best practices. With an eye on cross-border investment, China and the EU have formulated jointly recognized standards for defining green projects to channel global capital to sustainable businesses in the two markets.

In 2021, top Chinese officials promoted “common prosperity”, a concept behind key decisions, such as supporting small and mid-sized firms, regulatory crack down on tech giants, improving labor protection, the reforms in the education system, subsidizing vocational training, introducing the property tax, and encouraging charity and donations by rich groups and enterprises.

 

Moving forward, analysts expect that the country will focus more on addressing inequality, redistributing wealth (including across regions), and creating more opportunities for upward social mobility.

 

This trend has worried wealthy individuals, deep-pocketed enterprises, and certain sectors (luxury industry). To deter capital flight, officials have clarified that common prosperity is not “killing the rich to help the poor”.

Common prosperity is an essential requirement of China’s socialism and will impact policymaking in 2022. While its period invocation has been vague in detail and scope, more concrete measures are expected in the next few years.

Last year, the COVID pandemic caused worldwide shortages and supply chain difficulties. For China, this situation worsens due to the technology blockades imposed by the US, which blacklisted more Chinese quantum computing, semiconductor, and other tech entities and American companies are banned from selling materials and equipment to Chinese firms.

The Chinese government designed four strategies to solve the supply chain problem: the Dual Circulation Strategy (DCS), domestic innovation, the Belt and Road Initiative (BRI), and a counter-sanctions legal regime.

At the same time, China is seeking diverse and reliable global supply chains to secure energy and food. These motivations mean that China is certainly not keen to separate itself from the world.

Becoming a bigger import market is another strategy to increase other countries’ dependence on China – the reason to launch the import expo in Shanghai, although it will ultimately hinge on China’s spending power, which also relies on ‘common prosperity’.

Recently, the Politburo of the Communist Party of China (CCP), China’s top policymaking body, presented its economic plans for 2022, which will focus on financial stability and prudence as the country faces slowing growth.

According to state-run news outlet Xinhua, “actions should be taken to safeguard macroeconomic stability, keep major economic indicators within an appropriate range and maintain social stability to prepare for the Party’s 20th National Congress.”

Last year, the CCP focused on “strengthening anti-monopoly rules and preventing the disorderly expansion of capital,” triggering regulatory curbs aimed at reining in the power of big tech companies.

 

China’s business environment is constantly changing. Foreign investors should remain informed and up to date with the latest developments and regulation to be able to make quick decisions, avoid compliance risks and change business strategies if needed.


To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.