China's outlook in 2023: what's shaping business strategies
by Roberto Gilardino, Regional Managing Partner, APAC
As we enter the last days of 2022, China lifted COVID-19 restrictions and downgraded the virus – overnight on 26 December, 2022. Leaving businesses to grapple with the sudden shift, long-term impacts, and return to pre-pandemic times. Forecasting China's economic or its' general outlook for 2023 seems futile, considering the unprecedented 2022. Specifically, many clients noted that they were continuously ripping out the business status quo to navigate through this year.
Nonetheless, recent legislation signifies that Common Prosperity and digital transformation shall continue to dominate forthcoming regulations in 2023 and beyond. For companies, it is crucial to keep abreast of new policies and changes, as provisions can significantly impact business operations and strategies.
Common prosperity (共同富裕 gòngtóng fùyù)
'Common Prosperity' is not a 20th-century political term. Its literal translation is to get rich (富裕 fùyù) altogether (共同 gòngtóng) and first appeared in 1953 in People's Daily newspaper. The term is attributed to the holding of resources for the common and reflects the fundamental collective society in China. Most recently, it resurfaced in President Xi Jinping's inauguration speech as Party Secretary in 2017, and more predominantly in the Prospect Vision of the year 2035 in the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China (October 2020). The principle refers to prosperity for all people. Namely, socioeconomic development and wealth shall not be obtained by select individuals or groups, rather it is collectively acquired and benefited by the people.
In practice, Common Prosperity underlines socioeconomic reforms to alleviate poverty in the poorer regions and reduce socioeconomic polarisation between the urban and rural areas.
Common Prosperity in legislation
Legislation fostering sustainable economic growth and high-quality development are key to achieving Common Prosperity. For example, the revised Anti-Monopoly Law effective from 1 August 2022 elevates legal liabilities to prevent larger companies from monopolising the market and eliminating smaller competitors. Equally, the revisions prioritise anti-trust policies to ensure sustained market development and fairer market practices.
More recently, the revised Unfair Competition Law, draft for comment ('Revision'), issued on 22 November, strengthens legal protection for small and medium companies ('SMEs') in China. Specifically, Article 13 of the Revision targets companies with comparatively dominant positions and lists forbidden practices that disrupt fair trade and fair competition. Violating companies can face fines of up to 1 million RMB.
Moving into 2023, curbing monopolies, especially in the big tech companies and optimising a fairer market for SMEs shall continue. Common Prosperity promotion within the material, ecological and cultural in a context of high-quality development, as outlined by President Xi Jinping in the Central Committee for Financial and Economic Affairs (2021) will underline national and local policies.
Digital transformation of SME
SMEs are a driving force in China. Accounting for 50% of taxes, 60% of GDP and 70% of technology innovation, SMEs significantly contribute to economic growth. Industrial digital transformation for SMEs can be financially and practically challenging to implement. However, the digital transformation of SMEs is key to long-term development, reducing reliance on the external environment, and accelerating the overall digital economy.
The Circular of the General Office of the Ministry of Industry and Information Technology on Issuing the Guide to the Digital Transformation of Small and Medium-sized Enterprises ('Guide'), effective from 3 November 2022, calls local governments to advance digital development in SMEs. The Guide reflects Common Prosperity principles in fostering high-quality and sustained development for smaller companies. And provisions focus on lowering investment barriers for SMEs to upgrade software and integrate into a digital ecosystem.
Specific provisions promote the following:
providing small, fast, lightweight, and precise products and solutions
researching, developing, and promoting low-code products and services;
developing subscription-based software services
helping SMEs to create, deploy, use, and adjust digital applications themselves, and
improving SMEs' secondary development capability and demand response capability.
Overall, digitalisation plays a vital role in China's socioeconomic development. In 2023, we predict that local supportive policies should be issued by local governments to expedite internet applications for SMEs, upgrade company infrastructure, and make business operations more efficient and cost-effective. In addition, forthcoming cyber and data security regulations and rules are anticipated across sectors. Cyber security will become increasingly prevalent, as digitalisation accelerates in the business world.
What it means for foreign investment in China
For foreign companies, understanding Common Prosperity and its practical implications are essential.
Aligning business strategies with Chinese politics and policies determines a company's success and profits significantly.
The days of leveraging cheap labour in China or a western brand story are long gone. Sustainable investments that fulfills Common Prosperity are here to stay.
Moving to 2023, China's outlook may seem unpredictable, however, it is clear that foreign investment in China has moved into a new era.
If you have questions or concerns related to doing business in China, please contact Roberto at r.gilardino@horizons-advisory.com to schedule a consultation session. Horizons can provide insight, expertise and the right solutions for you.
Tags: Anti-Monopoly Law China economy Common Prosperity COVID-19 digital transformation Roberto Gilardino Unfair Competition Law