CHINA: DARK CLOUDS AND SILVER LININGS
China offers another case study. The world’s second-largest economy grew by 5.2 per cent in real terms last year. Yet economic sentiment in China has been gloomy, in contrast to the buoyant mood in the United States, which grew by only 2.5 per cent.
Part of this is due to expectations, against the backdrop of previous economic growth. China’s GDP growth has decelerated from an average of nearly 10 per cent between 1979 when economic reforms began and 2017, to an average of over 5 per cent from 2018 to 2023. Income levels are still only a fraction of the United States’, and as an emerging economy China is expected to catch up with the advanced economies.
Beyond the headline numbers, it is evident that the Chinese economy is facing significant headwinds. The property market crisis looms large given that the sector accounts for about 30 per cent of GDP. Foreign direct investment has tanked while pessimism has taken hold among sizeable numbers of Chinese youth.
To understand the situation requires a closer look at the drivers of China’s recent GDP growth.
While the share of state-owned enterprises (SOEs) in China’s economy has fallen over the decade as private enterprises gained ground, the latter have suffered a reversal of late.
A report by the Peterson Institute for International Economics found that the share of the state sector among China’s hundred largest listed companies expanded from 2020 to 2023, with SOE market capitalisation reaching 61 per cent in the first half of 2023. This does not bode well for economic dynamism, given that SOEs are perceived as less productive and innovative compared with their private sector counterparts.
Furthermore, the SOEs are often called upon to shore up the central government’s economic agenda. Recently, they were mobilised to purchase unsold homes with cheap funding provided by the state. Such measures can boost headline growth while masking underlying market weakness.
On a positive note, China’s growth is increasingly driven by new technologies including renewable energy, electric vehicles (EVs) and artificial intelligence. In 2023, China’s clean energy sector accounted for about 40 per cent of the country’s economic growth, according to a recent World Economic Forum report.
This aligns with President Xi Jinping’s stated aim of China transiting from high-speed growth to high-quality growth. For this to succeed China has to stay plugged into global supply chains and trade networks, so that it can export is products and capabilities to support the global climate transition, while obtaining the technology and inputs necessary to stay competitive.
However, the Chinese government’s support for the EV industry have prompted the US and EU to step up tariffs on Chinese EVs. With export growth potential limited by trade barriers, China has to increasingly rely on domestic consumption to support growth. Fundamental reforms may be needed to strengthen social security so that households do not have to build up high levels of precautionary savings.
