Previous Quarterly Editions
Expropriation Risk: 69 69 70 71 ►Political Violence Risk:48 48 48 48 ►Terrorism Risk:28 26 24 22 ▼Exchange Transfer and Trade Sanction Risk: 45 45 44 44 ►Sovereign Default Risk:37 37 37 46 ▲
TREND ▲
Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : Low LowAll protest: Low Low
Cost-of-living protest risk in 2023*Wage protest: High Food/fuel policy protests: Low
China’s National Bureau of Statistics in March announced a Consumer Price Index (CPI) growth figure for February of 1% year-on-year, compared with 2.1% in January. In the same week, the government work report (GWR) delivered by outgoing Premier Li Keqiang at the annual session of China’s legislature, the National People’s Congress (NPC), set targets for 2023 of around 3% for CPI inflation and around 5% for GDP growth.
These numbers have been widely read as reflecting recognition by China’s top leaders of the economic challenges facing the country. Low CPI growth, at least according to the state’s official statistics, leaves room for loose monetary policy to stimulate the economy. Longstanding domestic structural constraints on China’s economic growth have yet to be decisively addressed, despite years of on-and-off government policies targeted at fixing these problems.
Inflation abroad has weakened foreign demand and led to slowing growth in Chinese exports, although in absolute value China’s trade surplus reached a new record over 2022. Continued growth in exports has been the main factor cushioning the slowdown in China’s economy since the start
of the COVID-19 pandemic and the subsequent socioeconomic lockdowns, with consumer goods retail sales and real estate investment falling over 2022.
Protests around China in late 2022 against the lockdowns likely accelerated the decision to abandon the national ‘zero-COVID’ policy – the chief constraint on China’s economy since 2020. The costs of lockdowns, mass COVID-testing, and rising interest rates have compounded the fiscal difficulties of China’s local governments, which account for most of the nation’s social services spending. Local governments’ fiscal positions are further undermined by the slowdown of China’s real estate sector, which the central government has cracked down on to arrest its
accumulation of unsustainable debt levels, but which provided local governments with their largest source of direct income and accounts for a quarter of China’s GDP.
The central government’s policy pivot towards cushioning the real estate market’s freefall, with various measures adopted since November aimed at increasing liquidity for the sector and preventing more developers failing, is emblematic of the state’s adjustment to the realities of China’s economic troubles. This year’s GWR raised the monetary quota for special purpose bonds, one of the main channels for local government borrowing.
The GWR also signalled a shift in consumption-stimulating policies from an approach of targeting specific goods (for example, electric vehicles) to broader-based investment in industry and in raising income levels for both urban and rural residents, but without articulating specifically how this will be achieved. For example, no specific tax relief measures were announced at the NPC, although these may happen in coming months.
President Xi Jinping’s continued emphasis on raising economic self-reliance, especially in strategic technologies, means the state will continue to invest heavily in supply side policies. This is politically imperative given China’s difficult relations with advanced economies and the resulting pressures on China’s access to foreign leading-edge technology. Official rhetoric and further institutional centralisation, for instance in the new Central Science and Technology Commission, underscores how the Communist Party will assert its priorities on economic policy.
However, the central government appears to be more discriminating in its support to industry, given significant past wastage and resource misdirection. For example, despite foreign media reports of a forthcoming trillion-yuan support package for China’s semiconductor sector, under siege from U.S. export controls, the NPC produced no such announcements. Instead, the government is reportedly targeting support at a small number of firms playing important roles in China’s economic self-reliance progress.
Despite the priority on national self-reliance, the state is still aiming to keep China’s private sector sufficiently vibrant, and tensions with the outside world adequately under control, for economic development to continue benefiting from these two sources. The new Premier Li Qiang in his remarks at the NPC emphasized the role of entrepreneurs and China’s integration with the global economy. The 2023 GWR directed “national [equal] treatment” for foreign firms and attracting foreign capital by expanding its access to domestic markets, notably in “modern services industries,” as well as China’s accession to new international trade agreements.
Against this backdrop, the level of popular discontent seen immediately prior to relaxation of the zero-COVID policy is unlikely to be replicated due to discontent about the general state of the economy. Based on current data the economy is still growing, although it is unlikely to meet the target set in March of around 5.5% growth.
Inflation levels are unlikely to create significant hardship for most Chinese urban households, although given their typically high savings rates, the reducing real value of savings may become a concern if inflation rises further.
The state’s coercive power was not deployed against the anti-lockdown protests, but it has been demonstrated against other outbreaks of frustration linked to financial and general economic conditions, such as the localized protests in Henan during 2022 over bank account access and corruption.
TREND ►
Increasingly, authorities are focusing on foreign hi-tech providers in priority sectors. Such firms are still generally protected by China’s need for their technological contributions, and for their assistance in lobbying against the trend towards restricting exchanges with China in their home jurisdictions. In general, foreign firms face an increasingly difficult environment, given the national policy priority on self-reliance and promoting domestic firms.
China’s government has not expropriated foreign property overtly since the early Maoist period and shows no inclination to do so now. However, locally, it is possible authorities might force a foreign firm to divest at a low price or on unfavourable terms, or effectively force it to remain when it would rather leave.
The Anti-Foreign-Sanctions Law explicitly authorises the government, among other things, to seize real estate and other assets of individuals and organisations that “directly or indirectly participate in the drafting, decision-making, or implementation” of sanctions against China. The law was used for the first, and so far, only, time in February 2022, to sanction U.S. defence firms Lockheed Martin and Raytheon Technologies in connection with their arms sales to Taiwan.
Conceivably, the government may pressure large foreign firms into making philanthropic donations of money or resources, as the domestic internet giants have done recently.
The Communist Party’s political control apparatus is sophisticated and well-resourced. It is virtually impossible to mobilise any political opposition. Outbreaks of localised violence targeting local officials over specific grievances occur, but the system can crush them before they develop.
Authorities are practiced at combining forceful repression with half measures to defuse discontent. An example is provided by the response to mass protests and mortgage payment boycotts linked to the slow-burn crisis in China’s over-leveraged real estate sector.
An elite-level coup is conceivable but there is nothing to suggest this is currently a significant risk. A coup in any case would likely remain ‘within the system’, and perhaps even remain concealed for some time afterwards.
TREND ▼
In a country of China’s size, isolated acts of violence by individuals with grudges inevitably sometimes occur and can include bombings. However, the only significant potential for organised terrorism in pursuit of a political agenda comes from Xinjiang.
The government claims terrorists in or from this region have caused more than 400 deaths since 1990. All but a couple of these incidents have been very small and unsophisticated, and none has occurred since 2017, when the government rolled out comprehensive surveillance and social control systems in Xinjiang.
Beijing has a record of selectively applying regulations to hurt firms from countries whose governments say or do things it objects to. Such ‘de facto sanctions’ have been used against South Korea, Australia, and Lithuania recently. Restrictions can affect imports and exports. The industries targeted vary but are typically those holding minimal strategic importance to China and significant (if not necessarily overwhelming) importance to the target country.
A series of laws and regulations introduced in recent years, for example the Anti-Foreign-Sanctions Law and the ‘Unreliable Entity List’, give Beijing means of imposing sanctions directly and overtly, with associated deterrent effects. The range of such tools continues to expand. For example, the 2021 Data Security Law provides for extraterritorial exercise of jurisdiction to retaliate against foreign government measures seen to harm Chinese interests. Cross-Border Data Transfer Regulations adopted in 2022 make a potentially wide range of data transfers out of China subject to security review by Chinese authorities, which will likely encourage data localisation by foreign firms in China.
The Anti-Foreign-Sanctions Law authorises the government to apply sanctions in a tit-for-tat manner to foreign individuals and organisations that “directly or indirectly participate in the drafting, decision-making, or implementation” of sanctions against China, as noted. Countermeasures may include denial or cancellation of visas, deportation, seizure of real estate and other assets located in China, prohibiting transactions and cooperation with Chinese individuals and entities, and “other necessary measures.” The law potentially puts foreign firms in a position of having to choose between violating foreign sanctions and risking Chinese countersanctions.
*Note: Protest intensity is calculated based on ACLED. Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of calculations, see the introductory essay.
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The central government’s fiscal position is sufficiently strong there is negligible risk of it being unable to meet debt obligations. It is possible, however, a state organ might, without making it explicit, decide to withhold or block payment to a foreign creditor, as a means of applying pressure on that firm or its home government for political reasons, most likely as part of a broader suite of measures.
