Economic and Trade Opportunities for China in 20233

By Zhao Ailing

2022 was extraordinary. The COVID-19 pandemic together with downward consumption， put the macro economy under greater pressure. However， against complex and severe situations at home and abroad， China remained the worlds second largest economy in 2022， and the total value of imports and exports exceeded RMB 40 trillion for the first time， making a new record and meaning China has been the leading goods trading country across the world for six consecutive years. All these figures demonstrated the strong resilience of Chinas foreign trade. In the same year， the 20th CPC National Congress was held successfully， injecting more certainty for the future development of China.

2023 marks the first anniversary of the Regional Comprehensive Economic Partnership （RCEP）， which has greatly boosted the confidence in regional economic recovery， and also the 10th anniversary of the Belt and Road after it launched construction， which attracts more and more participant countries. Digital trade is now an important part of the digital economy and represents an important trend in global trade development. In the era of the digital economy， the combination between digital technology and the real economy will be accelerated. To realize carbon peaking targets and carbon neutrality， Chinese enterprises are integrating environmental， social and governance （ESG） into their corporate development strategies， and paying more attention to the green transformation.

Security of Industry Chain and Supply Chain

Security was another top topic in the report of the 20th CPC National Congress （hereinafter referred to as“the Report”）， comparable to the term innovation. As a high-frequency word， security was mentioned 181 times in the Report and 182 times in the 14th FiveYear Plan， which to a certain extent reflected the importance of security to high-quality national economic and social development in all aspects， and the determination of China to seek a high level of development in the context of the current tough and complex international situation.

The Report proposed to ensure that food， energy， and industrial and supply chains are secure and reliable. Safeguarding food security requires the adherence to the red line of no less than 1.8 billion mu （120 million hectares） of arable land and resolving the problem of the high external dependence on seeds. To ensure energy security， China should reduce the external dependence on oil and natural gas， and effectively advance the new energy strategy. Reliable industrial chains need to solve the bottlenecks of chips， core software and other key technologies， effectively integrate and control industry chain resources， focus on artificial intelligence， quantum information， integrated circuits and other key sections and links， improve the resilience of industrial and supply chain， and accelerate the construction of a new-generation independent and controllable information technology industrial system.

In recent years， to break these bottlenecks， and ensure technology is autonomous and controllable， China has been increasing investment in basic theory and underlying technology. The 14th Five-Year Plan for the first time included the mention of the proportion of investment in basic research to total research and development spending， proposing that the proportion should top 8% by 2025. In the future， it is expected that China will continue to strengthen investment in and policy support for basic research in key areas. It is understood that more than 90% of the investment in basic research in China comes from the government and universities， while enterprises only contribute 3.8%， and contributions from other social sources including private non-profit organizations is quite near to zero. On the contrary， in developed countries， enterprises would account for more than 20% of investment in basic research， and even close to 60% in South Korea.

According to Jiang Liqin， partner and head of clients and markets at KPMG China， China needs to strike a reasonable balance between economic and social development and national security in the future. In recent years， global natural disasters， hiking prices for food and energy and increasingly fluctuating financial markets， and geopolitics， have increased challenges for governments， businesses and residents， and lead to a more uncertain global economy. At the same time， geopolitical conflicts also resulted a series of restrictive measures in economic， financial， and technological fields， further stressing the importance of security. In one word， China needs to continuously perfect its national security system， to ensure the security of food， energy and key supply and industrial chains and guarantee the new development pattern with a new security pattern.

Digital Trade

Digital trade is playing an important role in promoting the development of the digital economy， and represents an important trend in global trade market.

On December 11， 2022， the first Global Digital Trade Expo was opened in Hangzhou. With the theme of “Digital Trade， Connecting the World”， it is the only national professional expo for global participants approved by the Central Committee of the Communist Party of China and the State Council.

In the latest business-friendly environment assessment system by the World Bank in 2022， digital trade has been attached the same importance as trade in services and trade in goods. According to the World Trade Organization （WTO）， by 2030， digital technology will cumulatively boost an increase in global trade of 34%. Making use of the advancements in digital technology， developing countries would take a share in the global trade market rising from 46% in 2015 to 57% in 2030.

The global trade in digital services is growing rapidly， which also reveals strong resilience against the severe impact of current epidemic on traditional trade in services. In 2020， when the COVID-19 pandemic broke out globally， digital trade accounted for 61.2% of trade in services， making a new record in value. The pandemic accelerated the digital transformation of traditional service trade and the development of new digital service industries. For example， finance， insurance， education and other sectors are accelerating the shift from offline to online， and new digital service industries， such as online offices， short video and cloud computing， ushered in great development opportunities.

In view of the competitive landscape， global digital trade is relatively concentrated， as the top ten economies contributing more than 50% of both imports and exports between 2014 and 2020. Between 2015 and 2020， China rose from 7th to 3rd in terms of world ranking of telecom computer trade， taking a 9% share. Meanwhile， China was among the global top ten intellectual property exporters for the first time， ranking 9th globally.

The digital trade of imports and exports in China maintains a steady growth trend over the past decade generally. In 2020 China was ranked the 5th among 105 countries and regions around the world in terms of the size of digital trade in services， meaning it entered the top 5 for the first time in a decade， and it was the only developing economy in the top 5. However， Chinas proportion of digital service trade of total service trade is still lower （44%） than the world average （62%） in 2022. This percentage has increased steadily since 2015， meaning there is still more room for China to develop digital trade in services.

Zhang Lijun， PwC China regional economic clusters managing partner， said， that the world is moving into the era of the digital economy faster， and digitalization has become a strong driving force to the booming trade in services. A new global trade competition pattern with digital trade as the core is taking shape， the division of labor in the trade value chain is being adjusted， and the competition for the dominance of digital trade rules becomes increasingly intense. The accelerated development of new industries and new models represented by digital trade will lead to a new economic growth pole and a new international competitiveness system. China can lay out the development of digital trade with a diversified and overall idea， by actively studying the international rules of digital trade， formulating development plans， and preparing with solid digital infrastructure.

ESG

It was stated in the Report that“a green and low-carbon economy and society are crucial to high-quality development，” that “（China should）” work actively and prudently toward the goals of reaching peak carbon emissions and carbon neutrality， and that “reaching peak carbon emissions and achieving carbon neutrality will mean a broad and profound systemic socio-economic transformation”.

Nowadays， climate and environment-related risks are the most important medium- and long-term challenges the world faces， and the natural disasters and economic losses due to such risks have increased significantly， so speeding up the need for a low-carbon transition has become a consensus for global economic sustainable development. In line with the continuous promotion of the UN Framework Convention on Climate Change and the Convention on Biological Diversity， international agencies are actively advancing the legislation for sustainable information disclosure.

Driven by the goals of carbon peaking and carbon neutrality， Chinese companies are integrating environmental， social and governance（ESG） into their corporate development strategies. According to some experts， there are three noteworthy trends in global sustainability disclosure standards and new frameworks for sustainable finance. First， the EU leads in international efforts in corporate sustainability disclosure legislation. In November 2022 the European Parliament and the Council of Europe Union respectively deliberated and approved the proposal for Corporate Sustainability Reporting Directive （CSRD）， to replace the Non-Financial Reporting Directive（NFRD） introduced in 2014. Second， a set of sustainability disclosure standards is rapidly established globally. International Sustainability Standards Board （ISSB）， under the support of International Organization of Securities Commissions （IOSCO） and G20 finance ministers and central bank governors， was founded in November 2021 and issued an exposure draft in March 2022. Third， the green and sustainable finance framework is being further improved. According to the UN Environment Programmes“Emissions Gap Report 2022”， its estimated that the global low-carbon transition requires at least USD 4 to 6 trillion of investment per year.

According to related surveys， the non-fossil energy will play a leading role in China by 2060， as its share will grow from less than 20% at present to more than 80%. From a cost perspective， although there is still some space， the carbon-reduction potential for the stock traditional high-carbon energy is regressive， meaning as it moves on the potential for carbon reduction will be more limited， the technical challenge and the costs will hike. Meanwhile， as an incremental， low-carbon or zero-carbon new energies， will have an accelerated declining cost， with the green premium of some products turning from positive to negative. Due to the changes in costs， new energy alternatives will have larger cost advantages in carbon reduction， compared to traditional energies， which in turn stimulates the role conversion between new and traditional energies.

According to Liu Shijin， Deputy Director of the Committee for Economic Affairs of the National Com- mittee of the Chinese Peoples Political Consultative Conference and former deputy director of Development Research Center of the State Council， China should take a path of “giving priority to the incremental， replacing the obsolete with new， stimulating innovations， and playing the driving role of the market”， to boost energy and economic green transformation and to realize a win-win result of carbon reduction and economic growth. An interdependent system of rules and policies should be established， and also an accounting method and operational mechanism targeting at “controlling both the total amount and intensity” of carbon emissions and a win-win situation for both carbon reduction and economic growth.

There has been a consensus on sustainable development for the low-carbon transition， and ESG disclosure requirements are constantly being improved. So， Chinese enterprises， especially those with global layout or deeply involved in global supply chains， should make advance arrangements， benchmark themselves against industry leaders and international peers， conduct comprehensive assessments， improve relevant ESG strategies， enhance the positive impact on society and the environment， better respond to challenges such as climate change， and take market opportunities in the context of carbon peaking and carbon neutrality policies.

Integration of digital and real economy

The Report proposed to promote the deep integration of the digital economy and the real economy. In recent years， digital technology has brought a comprehensive transformation to the traditional industries through the chain， and data as an element has quickly been applied in various sectors of production， distribution， circulation， consumption， social services and other management aspects. The deep integration and development of the digital economy and the real economy has provided a new accelerator for China to boost economic transition toward high quality and efficiency， and also a new momentum of economic growth.

The digital transformation of enterprises has been a hot topic for years， and the data has become the core driver of digital economy development and corporate transformation. Behind the rapid developing digital economy is the support of overall technological capabilities that incorporate algorithms， computing power and data. In general， China is now at the forefront of the world in many new technology areas and has gradually started to scale up commercial applications. According to the KPMG Global Emerging Technology Survey Report released in 2022， 99% of the executives surveyed said they had already been rewarded by the digital investments， and 66% respondents were expressed by the effectiveness.

In fact， the integration of the digital technology with the real economy is speeding up. Digital transformation has more practical significance to corporate development， emerging technologies continue to drive the digital wave forward， business scenarios are opened up to innovation， and enterprises conduct product upgrades and model innovation through digital transformations. As a whole， the integration of the digital technology and the real economy is accelerating， in a comprehensive and ecologically innovative way， different from sporadic and punctiform combinations in the past. Application scenarios are more mature in fields like the automobile， manufacturing and agriculture industries. For example， new energy vehicles and networking smart features are getting more and more popular， and the participation of more digital talents in the R&D and production results in more typical and mature scenarios. In the manufacturing industry， the establishment of digital twin factories， the interconnection of hardware devices， and real-time interactive management， all greatly improve production efficiency and management accuracy. In the field of agriculture， the digitization of agricultural bases， the standardization of productive organizations， intelligent sorting and digital logistics and other new and mature models with characteristic of the digital countryside are demonstrating the value of digital-real economy integration.

More and more startups are rooted in the digital ecology from the day they were founded， and gain a first-mover advantage over a large number of traditional enterprises， while digital-native enterprises are helping the real economy in turn.

Besides， digitalization is moving upstream along various industrial chains， from the store to the factory， from the table to the land， from the interactive digital world to the virtual world， as the whole chain is required to be digitalized， namely，“deep penetration at the source”. At the terminals， the digitalization is rapidly expanding from consumers to businesses and governments. In the second half of digital transformation， in addition to personal consumption products， the production methods， infrastructure， government services， etc. will be digitalized more quickly.

RCEP

The one-year implementation of the RCEP has significantly boosted confidence in regional economic recovery and injected a strong impetus to regional and global trade and investment growth. And on January 2， 2023， the RCEP officially entered into force in Indonesia， meaning 4 more countries had approved the agreement since early 2022 when 10 countries carried out the RCEP. From January to November 2022， the total imports and exports between China and other RCEP members reached RMB 11.8 trillion， up 7.9% year-on-year， a growth rate much higher than that of the trade between China and the European Union and the United States during the same period. Foreign trade with other RCEP member countries contributed 30.7% of Chinas total imports and exports.

Last year， to carry out the RCEP smoothly， the Ministry of Commerce and other six departments jointly issued the “Guidance on High-Quality Implementation of Regional Comprehensive Economic Partnership” （hereinafter referred to as the Guidance）， and the Ministry of Commerce specifically held a series of special training on the RCEP， covering all provinces， autonomous regions and municipalities in China， and all key industry sectors. To effectively implement the Guidance， all provinces， autonomous regions and municipalities have successively issued measures to secure high-quality implementation of the RCEP， and the CCPIT， and local customs and governments also developed a series of training courses on the interpretation and utilization of RCEP policies.

Yan Yun， Director of the Trade Promotion and Exchange Center of the CCPIT， said in an interview that generally speaking， the RCEP helps deepen regional economic and trade cooperation， consolidate regional industrial chains and supply chains， improve trade and investment liberalization and facilitation， and build a more convenient and friendly regional business environment. Enterprises mainly enjoy tariff preference for trade in goods through RCEP certificates of origin. As of December 15， 2022， Chinas trade promotion system issued more than 150，000 RCEP certificates of origin， involving a total amount of USD 6.6 billion， most of which were for the textile， chemical， and machinery industries， amongst others. It was expected the tariffs for Chinese products exported to other RCEP member countries were cut by about USD 100 million. Among them， Japan made the greatest contribution， accounting for nearly 94% of the total tariff cut.

In addition to the gradual re- lease of tariff bonuses， another outstanding advantage of the RCEP is to play the role of cumulative rules of origin. Yan Yun said， the RCEP smoothes the two-way flow of elements along the industrial chain and supply chain， helping China develop a more cost-advantageous and tough development paradigm featuring dual circulation （in which domestic and overseas markets reinforce each other， with the domestic market as the mainstay） in the RCEP region. This development paradigm is crucial for enterprises to break through the limitations of domestic market and the instability of overseas market， and better mix into the regional value chain system.

It can be expected， taking the RCEP as a new starting point， that in 2023 China will negotiate and conclude FTAs with more trading partners， expand the global network of high-level free trade zones. Meanwhile， China will further open up the markets of trade in goods， services and investment； participate in negotiations on new rules such as digital economy and environmental protection； and steadily expand the institutional opening-up including rules， regulations， management and standards.