The year ahead 2022: how China’s policy shift could affect UK business

The People’s Republic has announced its aim to combat poverty and focus on the middle classes.

China’s ‘common prosperity’ policy represents a paradigm shift for the People’s Republic following 40 years of rapid market expansion.

Over the coming years, the Chinese government plans to redistribute income to both expand the middle class and increase the incomes of the poor, as well as curtailing the ‘excessive’ incomes of the super-rich.

Freed from the pressures of achieving lofty economic growth targets, local government will instead be incentivised to achieve what might be called ‘quality’ growth. But those who see this as an end to the story of Chinese expansion at all costs should remember that a growing middle class brings with it higher consumption. Combined with higher-value manufacturing, China will still grow much as it has done previously. But there will be a shift from the debt-driven property and infrastructure investment of the past few decades.

Just as the UK is seeking to ‘level up’ part of its economy, China’s desire for common prosperity has bigger implications for the rest of the world. Here are three trends that UK SMEs may wish to monitor.

1. The focus on domestic tech

One of China’s key priorities continues to be the development and competitiveness of high-tech, high-value-adding sectors like electric vehicles, artificial intelligence, high-end manufacturing and semiconductors.

Yet the state’s support for indigenous technologies and innovation doesn’t mean it will decouple from the rest of the world. Rather, it should be seen as a bid to protect itself from external trade and policy shocks. Examples in recent times include former US president Donald Trump’s trade war, as well as increased competition in tech. Capital flows remain an important source of funding to fuel these goals, and it should be noted that foreign direct investment (FDI) into China was healthy during the pandemic and trade war with the US.

SME takeaway: If it is keen on increasing consumption, this may mean opportunities for exporters to China, which is willing to see its trade surplus dwindle.

2. The role of global inflation

Despite its economic ambitions, China will not rapidly end lower-value manufacturing. In 2020 and 2021, China increased its shares of trade and manufacturing, and much of this would have been low-value goods. This should go some way towards calming fears about China exporting inflation and making some goods more expensive overseas.

Where Chinese wages have increased in lower-value manufacturing – such as the apparel industry – supply chains have relocated, meaning no significant impact on global inflation. If anything, concern around environmental, social and governance ESG and sustainability are more likely to be drive global inflationary pressure.

SME takeaway: Businesses that rely on affordable imports from China will need to monitor costs across their supply chain and may need to broaden their supplier mix to alternative options from other locations such as Southeast Asia. 

3. A belated return for China tourism

Strict border controls and the zero-tolerance policy towards Covid-19 are likely to be around into the first half of 2022 – not least because Beijing is home to the Winter Olympics in February. The return of Chinese outbound tourism will therefore likely be slow.

SME takeaway: Retail, leisure and tourist businesses that have missed Chinese consumers on UK soil during the pandemic should not expect a swift return of visitors. However, the burgeoning middle class in China will mean increased demand in the long run

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