Cautious tweaks to macroeconomic policy would only partly offset these headwinds. Beijing’s tolerance for slower growth appears to have grown as it accepts that this is a price that must be paid when prioritising debt reduction, cutting carbon emissions and implementing further reforms.
For 2022, management of the economy looks set to focus more on resolving structural problems and supply-side disruption, notably power shortages, surging energy prices and producer price inflation.
Given these objectives, the People’s Bank of China is highly unlikely to open the monetary floodgates as it will be keen to avoid sending out policy easing signals that could fuel inflation and derail the government’s debt reduction and ‘Go Green’ efforts.
Conventional wisdom argues that China’s annual GDP growth would fall to 4%-5% in the next three to five years. However, the market may have overlooked the impact on the outlook of the return of industrialisation alongside structural changes.
The manufacturing sector has regained policy favour under Beijing’s new reform tactics. These favour high-value manufacturing and hard tech production over traditional manufacturing and soft tech investments. Hard tech refers to the production of hardware and components that cater for the country’s strategic and high-tech development; soft tech refers to the development of e-commerce catering for non-strategic consumption demand.
China’s domestic sector started a slow rebalancing in 2005. This involved reducing costs and improving infrastructure to drive industrialisation towards poor inland provinces. The strategy resulted in a regional division of labour. The expensive eastern region moved from manufacturing to high value-added services industries; cheaper inland regions picked up low value-added manufacturing.
However, the migration process has reversed since 2013 (see Exhibit 1) when Beijing refocused the drivers of economic growth on services and consumption. This led to a rise in the tertiary sector’s share of GDP at the expense of the secondary sector. Overall GDP growth slowed, reflecting Beijing’s policy at the time to trade off a slower GDP growth rate against higher growth quality.
Now, industrial migration to the interior provinces is likely to resume, with high-value-added industries dominating. The government’s efforts to achieve carbon neutrality by 2060 are set to open up new growth sectors and investment opportunities to replace the ‘sunset’ sectors.
China needs to upgrade its electricity grid and develop energy storage systems to improve energy supply and distribution. It also needs to wind down fossil fuel consumption by using more green electricity and achieve a structural shift from energy-intensive heavy industry to high value-added segments to boost energy efficiency.
New-sector investments are estimated to amount to RMB 5 trillion (USD 781 billion) a year – about 10% of China’s annual total fixed asset investment – over the next decade. 
Mobilising private capital is crucial to support investment in the ‘Go Green’ areas. Together with hard tech development, this should revive China’s GDP growth and raise the country’s medium-term productivity.
Time will tell how well these trends evolve, but they already provide useful food for thought when assessing China’s outlook and thus how investors can best position their 2022 investment strategies.
 “China’s new growth driver”, HSBC Global Research). Decarbonisation can drive mainland China’s growth | Insights | HSBC
Senior Market Strategist at BNP Paribas Asset Management
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