Chapter 1: Overview of China's 2022 Forecast

What lies ahead for China in 2022? Is the nation retreating into isolation while distancing itself from the global community? Current projections for China present a rather bleak outlook.

A notable figure in long-term forecasting, economist and Nobel laureate Kenneth Arrow once requested to be relieved from his forecasting duties in the US Army. He believed his predictions were akin to mere guesswork. His superiors, however, declined his request, emphasizing the necessity of forecasts for strategic planning, regardless of their accuracy.

Forecasting political trends can be equally challenging. Obtaining reliable insights into an uncertain future is fraught with difficulties, especially in China, where information is tightly regulated and decisions are often made behind closed doors. Yet, this does not render forecasting meaningless; rather, it underscores its importance. The insights gained from these forecasts help to manage uncertainty, allowing for better contingency planning and the formulation of long-term strategies.

To supplement the annual MERICS China Forecast, we also reviewed predictions from five additional organizations (Eurasia Group, Economist, EY, Control Risks, and SupChina) to analyze their expectations regarding China's trajectory and international relations.

The combined findings reveal a pessimistic scenario for 2022. In pursuit of increased domestic control, China is expected to become more insular.

Section 1.1: Domestic Control and the Zero-Covid Policy

Anticipated forecasts indicate that China is likely to continue its zero-Covid approach, although managing this amidst the highly transmissible Omicron variant will become increasingly challenging. Beijing may have to implement more stringent measures, as evidenced by the Xi'an lockdown. The Economist predicts that reopening borders will be unlikely in 2022. Eurasia Group foresees that the zero-Covid strategy will ultimately falter, as it pressures the economy and raises public discontent. SupChina suggests that the policy will remain in effect at least until after the 20th Party Congress, with some regions possibly easing restrictions post the National People's Congress and the Chinese People's Political Consultative Conference in March.

Subsection 1.1.1: The Shift Towards "Common Prosperity"

In alignment with the "Common Prosperity" initiative, the Chinese Communist Party (CCP) is expected to heighten its economic and social oversight. All forecasts indicate an increase in regulatory measures. The Economist predicts that Xi Jinping will "redefine the rules governing the economy," while Control Risks anticipates a deeper scrutiny of businesses regarding antitrust, data security, and social responsibility, alongside tax reforms. SupChina envisions a "reforged economy and rewritten social contract," with Beijing addressing demographic challenges through more invasive reproductive policies. Eurasia Group summarizes this tightening of domestic control, stating that "Xi aims to compel all facets of Chinese society to accept a new normal characterized by intensified regulation across political, ideological, social, and economic realms."

Chapter 2: Economic Challenges and Geopolitical Ramifications

As noted in the video "What will China do in 2022?", the country's increasing domestic control adds downward pressure on its economy. Three out of five forecasts predict economic stagnation. Eurasia Group warns that Xi's policies could lead to "the risk of stagnation at a time when the Chinese economy is already vulnerable." Control Risks foresees a slowing economic trend in 2022, while SupChina predicts a drastic economic slowdown as China restructures its economy by deflating its real estate sector and reinvesting in stable growth sectors. The weakening of GDP growth observed in Q4 is expected to persist into 2022.

In the video "After 8 years living in China, these are the 8 reasons why I still don't want to leave!", the discussion touches upon the broader implications of China's domestic policies on international relations. The zero-Covid strategy, for instance, hampers cross-border trade, personal interactions, and may exacerbate congestion at Chinese ports, further straining global supply chains.

Overall, the forecasts indicate an escalation of decoupling and geopolitical divisions. The Economist highlights the systemic rivalry between the United States and China, especially with the upcoming US mid-term elections and the 20th Party Congress in Beijing emphasizing the theme of "democracy versus autocracy." Control Risks views China as "the focal point for global apprehensions of decoupling," while EY notes that "divergence has led to a bifurcated world." Conversely, Eurasia Group acknowledges these divergence trends but argues that a "Cold War 2.0" narrative is misleading, asserting that the economies of Washington and Beijing are becoming more intertwined overall.

The tech sector is particularly susceptible to these decoupling trends. Eurasia Group describes it as a "Technopolar World," predicting accelerated digital fragmentation and disruptions in key tech supply chains. EY mentions a rise in "technology nationalism," and SupChina forecasts that more prominent Chinese tech companies will delist from US stock exchanges.

While not explicitly mentioned in the forecasts, there is a reasonable possibility of increased divergence in financial, monetary, and economic realms, potentially resulting in heightened political tensions and strain on global business.

Both China and the US are intensifying government oversight over financial markets. China has proposed stricter regulations for companies seeking to list overseas, while the US Securities and Exchange Commission has introduced new disclosure requirements for Chinese firms. The year 2022 may thus witness more delistings of Chinese companies from Western exchanges, as highlighted by SupChina, alongside fewer initial public offerings in the West and a shift towards domestic listings in China.

Tensions may also arise around monetary policies and economic growth. Alicia Garcia-Herrero notes the trend of monetary decoupling, with the People's Bank of China reducing interest rates while Western central banks tighten policies due to inflation. This could hinder economic growth in Asia. Li Xingqian from China's Ministry of Commerce has criticized other nations for withdrawing stimulus too quickly, which adversely affects Chinese exports.

Lastly, the risk of escalating trade and economic tensions remains in 2022. The EU has lodged a complaint with the WTO regarding Chinese economic pressures on Lithuania. Brussels is expected to enhance its trade defense mechanisms, including an anti-coercion tool and regulations on foreign subsidies, which could be directed at Beijing. Furthermore, new due diligence laws may impact businesses sourcing products from Xinjiang. Eurasia Group has uniquely highlighted this concern, suggesting that corporations will find themselves caught in a dual-risk situation: they could face backlash from Chinese authorities and consumers for opposing forced labor practices, or from Western regulators and consumers for failing to take a stand.

This analysis was originally published by MERICS.