China Pathfinder: Q1 2022 Update

China’s leaders spent the first months of 2022 in damage-control mode, as a host of economic problems and new pandemic-related challenges piled up. With the entire city of Shanghai under a zero-COVID lockdown, the crackdown on technology firms ongoing, and the property sector deteriorating, good economic news was scarce. The lockdowns alone—not considering the less dire zero-COVID measures—have affected more than 25 percent of China’s population, hitting consumption and manufacturing across the country and triggering a broad public outcry.

On the geopolitical front, Beijing’s ambiguous positioning on Russia’s invasion of Ukraine raised the prospect of secondary sanctions, amplifying the risk calculations for foreign businesses in China. Foreign capital, meanwhile, has been flowing out of China amid a mounting debate about whether the country is becoming “uninvestable.” With the 20th Communist Party Congress scheduled for November, China’s leadership will be firmly focused on ensuring stability and growth this year, pushing reform down its list of priorities.

The bottom-line assessment for Q1 2022 shows Chinese authorities were active in three of the six economic clusters that make up the China Pathfinder analytical framework: financial system development, competition policy, and portfolio investment openness. There were fewer developments in the innovation, trade, and direct investment clusters. In assessing whether China’s economic system moved toward or away from market economy norms in this quarter, our analysis shows a distinctly negative shift.

This issue of the China Pathfinder Quarterly Update highlights China’s improbable GDP growth target for 2022. At 5.5 percent, it was seen as a stretch even before a new round of COVID-related lockdowns was imposed in the waning days of Q1. Beijing’s subsequent insistence on upholding the target suggests that political objectives will trump reform priorities in the run-up to the Communist Party Congress in late 2022. The report dives into three main factors contributing to slowing economic growth: the flagging real estate market, ongoing tech crackdown, and widespread zero-COVID lockdowns.