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China: turning inwards while opening up | Analyst Picks| RiskMap 2021

China

China: turning in while opening up 

Andrew Gilholm | Principal and Director of Analysis

China’s domestic story is often overshadowed by US-China conflict, but it is just as consequential, especially in 2021. China is the only major economy that grew in 2020. The IMF says cumulative global growth in 2020 and 2021 will be positive with China, and negative without it. Meanwhile, Beijing has repeatedly assured foreign firms that they are welcome despite diplomatic tensions and continued with selective market liberalisation.  

For all the disruption and uncertainty of recent years, China’s allure remains strong, reflected in investment flows and business sentiment surveys. Its fundamentals still compare favourably with most emerging markets. The China story looks particularly good in relative terms. Its growth and stability are remarkable by current global standards, and its geopolitical risks may look less daunting in 2021 relative to the perpetual upheaval of the Trump era.  

This comparative picture is important but can be misleading. Without the global COVID context, 2020 was a disaster for China, and the long-term damage is still unclear. China may look relatively rosy in 2021, but the real picture will be one of painful recovery and conflicting pressures. 

There are policy contradictions for Beijing as it prepares to unveil a new five-year economic plan in March, and celebrate the 100th anniversary of the ruling Communist Party of China (CPC) in July:  

  • It wants to increase industrial self-reliance including with import substitution, but also wants to retain foreign investment, and position China as a defender of stable trade and multilateralism.

  • It insists on a strong state sector and wields regulatory power to align businesses with national goals, but also seeks competitive, innovative companies and a more market-driven economy.

  • It made reducing risks in the financial system a “critical battle” and signalled tolerance for more SOE defaults in late 2020, but it prizes stability and fears shaking confidence in financial markets.

  • Businesses will be bombarded with contradictory signals and pressures in 2021, for instance companies are facing rising regulatory challenges in areas such as compliance with cybersecurity and data rules, which when met can then cause aggravation to other governments. However, they should not let geopolitical events obscure their view of crucial domestic developments, or let short-term drama and perceptions overshadow long-term fundamentals in their strategic thinking.

For a reminder of how fast perceptions change, recall that in January 2020, China had the world’s only COVID crisis, and many pundits declared it an existential threat to the ruling regime. By year-end, China was seen as a relative rock of stability, while debate raged about the stability of US institutions. In such turbulent times, a sense of focus and perspective is both more difficult and more important than ever.

 

China: turning inwards while opening up

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