China’s economy faces significant headwinds in 2022, including recurrent COVID-19 outbreaks, weak domestic demand, and constraints on the country’s state-led investment model. This will force Beijing to provide stimulus by potentially increasing government and state-owned enterprise (SOE) infrastructure investment, relaxing its financial deleveraging campaign and intervening in the foreign exchange market, which could result in a slowdown in economic reforms and a falloff in long-term potential output. As Chinese President Xi Jinping starts his third five-year term as General Secretary of the Chinese Communist Party (CCP) and head of state, political stability will depend on the government delivering continuous growth. Slower growth in the world’s second-largest economy would slow the aggregate global economy, as well as potentially challenge the social contract in which the CCP provides Chinese citizens economic prosperity in return for political legitimacy....
