Outlook of China’s economy: Storm looming or clear skies?

Key Points

  • China’s positive 2021 performance stands out vs other major economies
  • Yet is there significant downward pressure to come?
  • Which industries will come out as winners?

As many economies continue to battle the pandemic and inflation, we review the current situation in China.

1. Introduction

The Chinese economy continues to grow – posting an 8.1% year-on-year growth for 2021. This comes in combination with low inflation, as China registered a 1.5% CPI y-o-y growth. Both these figures comfortably beat the government’s targets of over 6% and under 3% respectively, and December’s CPI figure showed encouraging signs as it comes as a drop from November’s (2.3%). Employment is relatively on track too – 12.69 million new urban jobs were created last year, as urban unemployment rate registered at 5.1%, only 0.4% lower than the government target set last year.

China’s industrial production continues to impress as a major component of the economy. In particular, growth accelerated during December (4.3%) compared to November’s 3.8%. Shipments from China beat forecasts and jumped 21% in December, and total trade in goods expanded from $USD1.4 trillion in 2020 to reach $6.05 trillion U.S. dollars in 2021.

Foreign direct investment into China also hit a record high last year, rising 14.9% to a record high of RMB1.15 trillion in 2021, according to the Ministry of Commerce. The regulatory authority has made clear efforts to flatten previous road bumps such as clearing up and officially authorising the VIE model, as well as shortening the negative lists for foreign investment in 2022. You can learn more about the VIE structure by checking our previous article here.

2. Headwinds ahead

Despite positives at the end of 2021, the Chinese economy is set to brace for headwinds in 2022. Growth, in spite of outperforming expectations from the start of last year, has slowed. This has come due to the deterioration of some key sectors and has been projected to continue as the World Bank and International Monetary Fund have cut their forecasts down by 0.3% to 5.1% and 5.6% respectively.

The central bank has already began utilising monetary policy to stimulate economic growth. Last month, it slashed both the reserve requirement ratio — which determines how much cash banks must hold in reserve — and the loan prime rate. More recently, China has also cut interest rates in an effort to give the economy a boost.

COVID woes not over

The omicron variant continues to stand as a major roadblock for the Chinese economy, as China continues to maintain its zero-COVID policy. A partial lockdown has already been imposed in Tianjin, a northern port city that neighbours Beijing, after it reported the country’s first community-spread omicron cases – and harsher restrictions are expected to come for many key areas. While keeping cases low, consumer activity has significantly dropped (growth of 1.7% in December vs 3.9% in November) and the retail sector is likely to continue to suffer, especially through the first quarter of 2022.

Real estate in free fall

While Evergrande took majority of the headlines, the property sector – which makes up around 20% of China’s economy, has been haemorrhaging. December marked a huge downturn in the property sector as investments sank by 13.2% in that month alone, according to estimates by Chaoping Zhu, the chief global strategist for JP Morgan Asset Management. In addition to that, the authorities continue to tighten financial constraints for developers, so a shrink to the sector is almost guaranteed to come.

3. The Winners


To the surprise of no one, semiconductors continue to be a major winner. Being at the heart of road to China’s tech self-sufficiency, the industry will no doubt continue to receive government subsidies and preferential policies that kickstarted this surge in investment. China announced 28 additional wafer fabrication construction projects totalling US$26 billion in 2021 and ramped up production of ICs (integrated circuits) in 2021 by 33% – from 261.3 to 359.4 billion units.

Automation & robotics

In the same tone as semiconductors, automation and robotics remains as a huge focus, as upgrading manufacturing may be the optimal solution to current supply chain issues. In 2015, China set a goal of making 260,000 industrial robots a year by 2025 – and has accomplished it as production surpassed that figure in the first 3 quarters of 2021. This trend will continue, with innovation and technology being heavily emphasised in the newest 5-year plan, which we explored in a previous article that can be found here. The government also recently unveiled its aim to achieve a minimum annual growth of 20% in robotics sales by 2025, and to become the number one ranked country in robot density (currently 9th).


Harvest in China had another positive year, with grain output up 2%, or 13.4 billion kg, year on year to reach nearly 683 billion kg. This is the seventh consecutive year that the country’s total grain production has exceeded 650 billion kg. In addition, this sector is a major focus of government’s 5-year plan, so will likely receive the resources required to upgrade its efficiency to help China become more self-sufficient. The Ministry of Finance of China issued more than RMB20 billion as the central government’s subsidies for the purchase of agricultural machinery in 2020, and more government support is inbound as plans have been made for comprehensive mechanization rate of crop ploughing, planting and harvesting reach 75% by 2025.

Disclaimer: Our content is intended to be used solely for informational and educational purposes, and not as investment advice. Always do your research and consider your personal circumstances before making investment decisions. ChineseAlpha is not liable for any losses that may arise from relying on information provided.

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