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China’s political super-week

By Robert Xiao, Beijing director

As I am writing this week’s Viewsletter, the 2nd plenary session of the 20th Central Committee of the Chinese Communist Party (CCP) is in full swing. This meeting will set the tone for the upcoming annual sessions of the 14th National People’s Congress and Chinese People’s Political Consultative Conference (NPC and CPPCC, commonly known as the “two sessions”), which are scheduled to open on March 4th-5th.

Specifically, according to reports from the Politburo meeting chaired by President Xi Jinping last Tuesday, this 2nd plenary session is expected to review the proposal for “party-state reform” (党和国家机构改革方案) and provide recommended candidates for important personnel appointments during the “two sessions.” The EIU expects a makeover of party-state institutions to give the CCP stronger control over areas prioritised by the president. If the “party-state reform” proposal is passed, Mr Xi could tighten control over local governments and install several commissions under the party’s central committee to oversee key policy areas including financial services, technology, “common prosperity,” and population affairs, cementing his control. However, this consolidation of state bodies could further weaken balancing institutions such as the NPC, and while it could benefit policy enforcement and streamline policy implementation, it may also dampen business confidence and reduce the efficiency of resource allocation.

In addition, as for the upcoming two sessions, we expect the administration to announce an annual GDP growth target—at 5.5%—that it will beat (our forecast stands at 5.7%), although this will not be a story of triumph. The economy is rebounding meaningfully in the first half of 2023 on the back of pent-up private consumption demand. However, the marginal scale of improvements in the property sector and worsening external demand will preclude what might otherwise have been a stronger rebound. Moreover, fiscal reform and population policy—two wild cards that will have a substantial impact on China’s long-term growth—may also be announced during this plenary session (or at the next CCP plenary session, expected in the fourth quarter of 2023). The government is likely to initiate steps to redistribute fiscal responsibility between central and local governments, given that land sales revenue has dried up and local governments have resorted to cutting social welfare and delaying salary payments. Chinese leaders will also consider steps to mitigate the effects of population decline, such as child-friendly policies and retirement age extension, although we are pessimistic about their impact on demographic trends, particularly in the absence of a large-scale fiscal arrangement.

Finally, it’s also worth mentioning that the 14th CPPCC has added a new sector for “environmental resources” to optimize the sectoral structure and enhance the representativeness of the sectors. This is the first time since the establishment of the “Economic Sector” in the 8th CPPCC in 1993 that a new sector has been added. This move demonstrates the high importance that the country places on environmental resources at the national level, and is in line with China’s new understanding of environmental resources and a necessary step to achieve the goal of carbon neutrality and ensure the security of energy and arable land. In fact, with the potential to disrupt global commodity markets, China’s decarbonisation pathway will depend on policy predictability. Last week, the EIU produced a detailed report about China’s road to net zero. I share here with you the main takeaways of this report, and ultimately what it could mean for industrial sectors in the next year. I hope this summary will serve as useful guidance for your strategic and business considerations.

  • The power sector’s measured decarbonisation means that coal consumption will peak as soon as 2026, and decline steadily thereafter. The fast-paced installation of renewables entails sustained demand for relevant commodity inputs, with geopolitical implications as competition over them intensifies.

  • Electrification of China’s road transport will gradually but materially alter the global oil market. China’s production and export of electric vehicles will exacerbate existing global tensions around industrial policy and unfair subsidies.
  • Energy- and emission-intensive industries like steel and cement will be under significant decarbonisation pressure. The EIU advises companies to watch out for the development of market-based policy tools like emission trading, which will be an indicator of the government overcoming its long-standing institutional inertia.