The Year Ahead 2022: Six ways China’s ‘Common Prosperity’ policy could affect the global economy

November 22 2021

Peiqian LiuChina Economist. Ranked Top 10 China forecasters by Bloomberg.

View bio

Galvin ChiaEmerging Markets Strategist, CEEMEA

View bio

Brian DaingerfieldHead of G10 FX Strategy, Americas

The Year Ahead 2022 Summary Report

PDF (5.4 MB)

Download

Other insights

View more insights

4 minute read

China’s “Common Prosperity” policy looks set to be a game changer for the country as it refocuses its priorities away from economic expansion at breakneck speed at any cost towards a long-term goal of reducing domestic inequality in the years to come. We consider some of the key implications of the new policy and what they mean for the global economy.

The Common Prosperity policy represents a paradigm shift for China, with its focus on narrowing inequality and overturning the prior 40-year consensus of rapid market expansion at all costs and “letting some people get rich first”. The government plans to use taxation and other means to redistribute income to expand the proportion of people in the middle class and increase the incomes of the poor, as well as reducing what it deems the “excessive” incomes of the super-rich.

The new policy means that local government officials will no longer be pressured to achieve lofty economic growth targets and will instead be incentivised to achieve what might be called “quality” growth. But this isn’t to say that the Chinese growth story is in jeopardy: over the longer term, consumption by China’s growing middle class and higher manufacturing value-add should ensure growth over a multi-year horizon is well supported. It’s just that there will be a shift away from the debt-driven property and infrastructure investment of the past few decades.

China’s contribution to global economic growth (GDP*) is projected to fall below the combined contributions of the US, UK, and EU for the first time in more than a decade

Sources: IMF Forecasts, Haver, NatWest Markets. GDP is gross domestic product.

Meanwhile, further regulatory crackdowns look likely after the tutoring, internet, entertainment and gaming sectors were in the crosshairs earlier this year. For 2022 and beyond, President Xi has set out his aim to crack down on monopolies and the “disorderly expansion of capital”. We would not rule out continued risks for domestic markets, although we’d expect them to be better signalled than they were in 2021.

Listen to our podcast on the global implications of China’s new economic paradigm, ‘Common Prosperity’: Apple Podcasts, Spotify, YouTube.

Even though China’s drive for common prosperity is aimed at levelling up conditions within China, it has big implications for the rest of the world. Here are the six that are crucial for the global economy.

A key priority for China will be its continued focus on the development and competitiveness of high-tech, high-value-adding sectors like electric vehicles, artificial intelligence, high-end manufacturing, semiconductors. These sectors have been priorities for at least five years.

Yet the state’s continued push towards indigenous technologies and innovation doesn’t mean China will decouple from the rest of the world. Rather, it suggests to us a desire to protect itself from external trade and policy shocks like the Trump administration’s trade wars and from increased competition with developed nations for dominance in tech. As ever, capital flows remain an important source of funding to fuel the investment needed to achieve these goals. Indeed, foreign direct investment (FDI) inflows into China have remained robust despite the pandemic and trade war with the US in recent years.

In the years to come, imports will be important in helping China meet its aim of increasing domestic consumption and shifting its growth model, with the current account surplus returning to its earlier trend of narrowing, before eventually moving to deficit.

Trade relations look set to “build back boring” in 2022 and become much less volatile. It’s not just about trade – the focus is on competition for technological superiority and China’s state-led development policies in the tech sector. If anything, we would expect the focus of tensions to shift more hawkishly towards tech, with the overall rules of engagement emphasising competition rather than tariffs.

Recent US rhetoric suggests there will be continued enforcement of the Phase I trade deal, with no intention of removing existing tariffs and continued marshalling of US allies on a coordinated China trade policy. But coordinated action and a common agenda against China will be difficult given different countries’ hugely varying bilateral exposures to Chinese trade, as well as the risk of persistent supply chain shortages.

Geopolitical tensions are likely to persist, but they should remain contained. But China’s more assertive foreign policy (especially in its own backyard) will mean that regional tensions are likely to persist and will represent a source of headline risk. Issues such as Taiwanese independence, the South China Sea, and relations with the Australia, UK and US alliance could be particular focal points. Despite this, we don’t think escalation into open conflict is on China’s agenda, as we expect that it will stick to its current diplomatic playbook of hawkish rhetoric and posturing instead.

China’s economic ambitions do not mean that the country will be able to rapidly end lower-value manufacturing. In fact, 2020 and 2021 have shown that China has been opportunistic in increasing its shares of trade and manufacturing.

Supply chain shifts were underway long before the onset of the pandemic. For example, the garment manufacturing chain has been partially relocating into south / southeast Asia since the mid-2010s due to Chinese wages rising – without any significant impact on global inflation.

If anything, decisions to near-shore (or onshore) manufacturing, reduce supplier concentration and fragilities (by introducing redundancies), or take on board more ESG considerations are more likely to be drivers of global inflationary pressures.

The sheer volume at which China produces things will be enough to backstop commodity demand, but we don’t expect the country’s credit impulse – the change in new credit as a proportion of gross domestic product (GDP) – to be big enough to lead to further major commodity rallies.

The impact of this on emerging markets as a whole should be muted, particularly in the FX space. While emerging-market currencies have generally moved broadly in line with commodity prices in the past, their performance has lagged during this upswing in the commodity cycle, despite exports performing reasonably well. We attribute their lacklustre performance more to lagging growth in emerging economies and subdued capital flows.

We expect export flows for China and its Asian manufacturing peers to continue to perform well as shortages persist into the first half of 2022. Financial flows into China will remain supported, particularly as passive inflows continue with the gradual inclusion of Chinese government bonds in the FTSE World Government Bond Index over the next three years.

Global exports remain resilient – and will continue to support the yuan

Sources: Bloomberg, NatWest Markets

Importantly, we think that outflows will be constrained as well. Financial inflows slowed, but did not register outflows in 2021, even during the Q3 regulatory crackdown. A belated reopening of borders will also mean that tourism, the primary source of current account outflows, will remain muted and will resume later rather than sooner. The lack of outflows will bolster the current account balance in China, providing support for the yuan.

Finally, we think that stringent border controls and the zero-tolerance policy towards coronavirus are likely to persist well into the first half of next year as the government keeps a tight lid on infections in the lead-up to February’s Beijing Winter Olympics and beyond. The return of Chinese outbound tourism will probably be belated, and the risks appear skewed towards a later and slower recovery of tourism-dependent economies in the region.

Markets and Economy


This presentation has been prepared by National Westminster Bank Plc (“NatWest”) and NatWest Markets Plc and/or NatWest  Markets Securities Inc. (collectively “NWM”) or its affiliated entities (together, ”NatWest”/”NWM”, “we” or “us”)  exclusively for internal consideration by you (the “Recipient” or “you”).  This presentation is incomplete without reference to, and should be viewed solely in conjunction with, any oral briefing provided by NatWest/NWM.  NatWest/NWM and its affiliates, connected companies, employees or clients may have an interest or position in, or deal in, transactions or securities (or related securities or derivatives) of the type described in this presentation and may provide, or be seeking to provide, general banking, investment banking, credit and other financial services to any company or issuer of securities or financial instruments of the type referred to in this presentation. This material may constitute an invitation to consider entering into a derivatives transaction under U.S. CFTC Regulations sections 1.71 and 23.605, but is not and shall not be considered as a binding offer to buy or sell any financial instrument or enter into any transaction.

Nothing in this presentation should be construed as legal, tax, regulatory, accounting, finance, investment advice or other advice to you or any other party, or as a recommendation or offer, or solicitation of an offer,  by us to purchase securities from you or to sell securities to you as defined under US securities law, or to underwrite any of your securities or extend to you any credit or similar financing, or to conduct any such activities on your behalf and is not intended to form the basis of any investment decision. NatWest/NWM are not acting as advisor or fiduciary in any respect in connection with providing this information. Neither this presentation nor our analyses are, nor purport to be, appraisals or valuations of the assets, securities or business(es) of the Recipient or of any transaction counterparty.

This presentation is based solely upon information provided to NatWest/NWM by the Recipient and/or publicly available information. It reflects prevailing conditions and our initial views as at this date which we reserve the right to change from time to time. In preparing this presentation, we have relied upon and assumed, without verification, the accuracy and completeness of all information available to us, whether from public sources or provided by or on behalf of the Recipient, including any statements with respect to projections or prospects of the Recipient and related assumptions.  NatWest/NWM makes no representations or warranties (express or implied) with respect to this presentation, and disclaims all liability for any use by you, your affiliates, connected companies, employees, or your advisers make of it.  Any views expressed in this presentation (including statements or forecasts) constitute the judgment of NatWest/NWM  as of the date given and are subject to change without notice. NatWest/NWM  does not undertake to update this presentation or determine the accuracy or reasonableness of information or assumptions contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed. Past performance is not indicative of future performance.

NatWest/NWM transact business with counterparties on an arm’s length basis and on the basis that each counterparty is sophisticated and capable of independently evaluating the merits and risk of each transaction and that the counterparty is making an independent decision regarding any transaction.

This presentation has been prepared in response to a request to provide you with solutions to manage a risk or pursue an opportunity identified by you. This presentation is provided to you on the basis that you understand that NatWest/NWM  is not providing you with any "investment advice" within the meaning of Article 53 of the FSMA 2000 (Regulated Activities) Order 2001 and as a result, NatWest/NWM  is under no obligation to assess the suitability of the information provided in light of your knowledge and experience, financial situation and/or investment objectives. A consequence of the above is that NatWest/NWM  will not provide you with advice on the merits of buying, selling, subscribing for or underwriting (or exercising rights to acquire, dispose of or underwrite) any particular investment instrument. In accepting this information you acknowledge that you have been correctly categorised by NatWest/NWM as a Professional Client for the purposes of the Financial Conduct Authority's rules. As such, you acknowledge that you are capable of interpreting the information provided by NatWest/NWM  and using that information to take decisions as regards the merits of investing in particular investment instruments.

This presentation is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The information in this presentation is confidential and proprietary to NatWest/NWM  and is intended for use only by you and should not be reproduced or disclosed (in whole or in part) to any other person without our prior written consent. 

Not withstanding the foregoing (but subject to any applicable federal or state securities laws), NatWest/NWM may disclose to any and all persons, without limitation, the tax treatment and tax structure of any transaction contemplated hereby and all materials (including opinions or other tax analyses) relating thereto. IRS Circular 230 Disclosure: NatWest/NWM or affiliated entities do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with us, of any matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

No banking product or service described herein is or shall be considered as being offered by a US chartered bank or covered by FDIC insurance.

National Westminster Bank Plc. Registered in England & Wales No. 929027. Registered Office: 250 Bishopsgate, London EC2M 4AA. National Westminster Bank Plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

NatWest Markets Plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh, EH2 2YB. NatWest Markets Plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is provisionally registered as a swap dealer with the United States Commodity Futures Trading Commission . Securities business in the United States is conducted through NatWest Markets Securities Inc. a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned subsidiary of NatWest Markets Plc. NatWest Markets Securities Inc. is authorised by NatWest Markets Plc to act as its agent for certain kinds of its activities.  

NatWest Markets N.V. is authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten.  NatWest Markets N.V. is a wholly owned direct subsidiary of NatWest Markets Plc. Registered Office: Claude Debussylaan 94, 1082 MD Amsterdam, The Netherlands.

The Royal Bank of Scotland plc and National Westminster Bank Plc are authorised to act as agent for each other.