While spectators worldwide had pinned high hopes on China achieving a swift and sharp rebound in economic activity, the wheel of fortune turned more sluggishly than expected after its post-Covid reopening. A cocktail of pressing challenges, including subdued consumption and a slump in the property market, continue to cloud China’s recovery outlook. Despite a somewhat bumpy ride last year, the world’s second-largest economy managed to hit its growth target of 5%, expanding by 5.2% year-on-year to RMB 91.3 trillion.
2023 in review
Although growth was patchy in 2023, the preceding year was by no means a bearer of bad tidings. The Chinese government rolled out a host of stimulus measures aimed at rekindling demand and enhancing consumer confidence. These policies implemented in the initial three quarters of 2023 led to a sustained, albeit tentative, recovery of the economy. In particular, there was a marked acceleration in growth during the second quarter of 2023. China saw the fastest rate of growth since the same period in 2021, with its GDP climbing to 6.3% year-on-year in the second quarter of 2023 alone. In addition, GDP in the third quarter grew by 1.3% month-on-month, which was 0.8 percentage points higher than in the previous quarter. 2023 ended with a 5.2% year-on-year growth rate in the final quarter. Thanks to a more robust performance than expected, the IMF revised upwards China’s projected GDP growth for 2024 from 4.2% to 4.6%.
It is evident, however, that the foundation of China’s economic recovery is still shaky. As we take a glimpse into the depths of 2024, fortifying the foundation will involve tackling evolving challenges head-on to ensure resilient growth. Among these challenges are mounting deflationary pressures, lacklustre domestic demand, and a beleaguered property sector. These prevailing factors are likely to continue casting a long shadow over the recovery of China’s economy in 2024.
Road ahead not set in stone
Some pundits have argued, however, that the uniqueness of China’s economy defies a singular characterisation of its current dilemmas. The multidimensional nature of its economy is epitomised not only by its sheer size, but also by its vast regional and sectoral disparities. To unpack China’s USD 18-trillion economy by way of comparison: it is larger than the combined GDP of all European Union countries and six times the size of the ten economies of the Association of Southeast Asian Nations (“ASEAN”) altogether. Based on the latest figures published by the International Monetary Fund (“IMF”), China makes up roughly 18.5% of the global economy and contributes to around 35% of the world’s economic expansion.
It would, therefore, be premature to peremptorily declare that the challenges are here to stay. Rather, they are reflective of broader structural changes that began following the conclusion of the explosive surge in credit and investment from 2008 to 2016. In essence, the elements that propped up China’s rapid growth are unlikely to be replicated in the foreseeable future. The world’s economic dynamo is currently in the midst of a profound transformation. It is recalibrating its course towards sustained high-quality growth driven by consumption. The old engines of growth that propelled China to global stardom must give way to more consumption- and technology-centric alternatives.
Shift towards consumption-based growth model
In September 2023, the IMF urged China to adopt a consumption-based growth model and distance itself from traditional fixed asset investments. The latter, according to IMF Managing Director Kristalina Georgieva, is untenable and “unproductive” in the current climate. It is clear to both China and the world that investment-induced growth driven by housing and infrastructure has had its day. The big gear shift will require increasing the share of GDP attributed to consumption. This calls for a radical acceptance of a dip in GDP growth. It must be embraced as a necessary by-product to achieve a more sustainable and balanced growth trajectory in the long run.
Consumption contributed to 4.3% of last year’s growth, while investment accounted for 1.5%. There have been some bright spots on the consumer-spending front, as China’s services sector is starting to show incipient signs of recovery. In December 2023, activity in the sector experienced its most rapid expansion in five months. The Caixin services purchasing managers’ index for December 2023 – a composite indicator that gauges the health of the services industry – showed a notable improvement at 52.9, up from 51.5 in the previous month. The figure crossed the critical 50-point mark that distinguishes expansion from contraction. In addition, the result exceeded the anticipated 51.6, as forecast by economists surveyed by Bloomberg.
To write the next chapter of its consumer narrative, China must revive its muted consumer sentiment. Further, it must learn to navigate the dramatic shifts in the palate of domestic shoppers as well as demographic landscape. According to research conducted last year, China is expected to see an additional 80 million people join the ranks of its middle-class and affluent population. This segment, spanning nearly 40% of China’s total population, is poised to emerge as an enduring bulwark for the Chinese consumer market.
Big push for foreign investment
At the World Economic Forum summit held in Davos this January, delegates were told emphatically that the Chinese economy was open for business, with opportunities aplenty for foreign investment. On the ground, however, investor confidence seems to be more subdued. In 2023, foreign direct investment (“FDI”) into China suffered a drop for the first time in more than a decade. FDI flowing into the country totalled RMB 1.13 trillion last year, marking an 8% year-on-year decrease and the first contraction since 2012. In addition to cyclical factors, the reconfiguration of global value chains away from China is a key structural factor contributing to the slowdown in FDI inflows.
According to a report by Economist Intelligence, capital inflows are expected to eventually bounce back later in 2024, but they will primarily be focused on short-term portfolio investments. On the other hand, foreign companies are unlikely to budge on their cautious approach, holding off any hefty investments. While a rebound in FDI flows into China is projected in 2024 – thanks to reduced divestment pressures – the overall level will be modest compared to the heights seen prior to the pandemic.
In a bid to revitalise the foreign investment scene, China’s State Council issued a 24-point plan in August 2023. The guidelines embody China’s commitment to sustaining its high-quality opening-up. It vows to fully leverage its enormous consumer base and maximise the efficient utilisation of foreign investment. In addition, it pledges to foster a business environment that is market-oriented, legally sound, and internationally integrated. Encompassing six aspects, the 24 points cover a wide range of measures. These include promoting foreign investors’ participation in large-scale research endeavours and guaranteeing a level-playing field for domestic and foreign enterprises. Further, emphasis is placed on enhancing safeguarding mechanisms for foreign companies and increasing the provision of fiscal support.
Real estate challenges
The property sector has been the Achilles’ heel in China’s economic recovery. For a long time, Chinese home buyers had held onto the belief that real estate was a fail-safe investment. This staunch view drove the property sector to become the cornerstone of China’s economy, which accounts for around one-quarter of its economic output. The real estate engine began to splutter and stall after a clutch of rules was introduced in 2020, with the aim of restraining the rampant borrowing of real estate developers. With limited access to debt-funding sources, developers encountered difficulties in repaying loans and completing construction on properties that had been pre-sold to home buyers.
Since 2022, China’s property sector has exerted downward pressure on the country’s economic growth and contributed to its recent economic deceleration. Fixed-asset investment in the sector is expected to experience a third consecutive year of contraction in 2024. The housing market remains a crucial gauge of confidence, serving as a key indicator for both the economy and the financial markets. Therefore, the government is eager to contain the real estate malaise and stem any spill-over effects or contagion.
The task at hand is, however, no walk in the park. There remains a gaping gap between cumulative property sales and cumulative completion figures that shows no signs of narrowing. This trend is leading to a further weakening of sales, which in turn adds to the pressure on developers. In an effort to nurse the property sector back to health, the government has rolled out a series of stimulus programmes. At the start of this year, financial regulators stated that banks could extend commercial property loans to developers, enabling them to settle other outstanding loans and bonds. The central bank also reduced the requirement ratio to stimulate lending and pump liquidity into the economy.
Gradual uptick in exports
Following a tumultuous time last year, the recovery in Chinese exports is showing nascent indications of picking up pace. In December 2023, Chinese exports experienced a swifter growth, climbing by 2.3% and surpassing the 0.5% increase seen in November. The primary contributors to improved export figures are electronics and semiconductors, with the recovery being spurred by a cyclical upswing in consumer demand in foreign markets. Additionally, China’s electric vehicle industry that has taken the world by storm has seen exponential growth. It is among the rapidly expanding sectors that are emerging as key drivers of export growth.
Exports are forecast to stabilise over the course of this year, achieving a growth rate ranging from 0 to 5 percentage points. A cyclical trend of healthy export growth could be on the cards. Nonetheless, some persistent headwinds are likely to hamper China’s export outlook, including the global economic downturn and trade barriers.
While supply chains are indeed being reimagined and reshaped, China’s role in high-tech supply chains is arguably too entrenched for them to be overhauled overnight. It follows, then, that China’s ascendancy as a manufacturing powerhouse in the world is likely to remain uncontested. The country’s ascension in global value chains by moving upstream towards higher value-added production will no doubt have ripple effects on the rest of the players. The recent inflows of investment into ASEAN countries, in fact, illustrate a steadily increasing trend of Chinese manufacturers lengthening their supply chains. This is reflected in the record number of intermediate goods traded between China and Vietnam in the initial 11 months of 2023 which amounted to RMB 1.01 trillion. This accounted for 69.8% of their total trade volume.
Looking ahead: Innovation as a new engine of growth
Undaunted by the different challenges ahead, China is forging a new path of growth driven by innovation, as it continues to wean itself off reliance on the property sector. Its innovation imperative is becoming more pronounced than ever. The initiatives earmarked for launch in 2024 have a noticeably scientific and technological orientation. China’s aspiration to excel in cutting-edge technologies, such as advanced robotics, artificial intelligence, connected vehicle technology, and new generation information technology, signifies a decisive shift towards cultivating new productive capabilities. It is doggedly determined to set sail towards a new economic reality and transform into a global leader in technological innovation through and through.
Driving into the future, China is expected to give full play to its innovation advantage and assume the mantle of leadership in developing advanced technologies. According to the Global Innovation Index 2023, China led the field, hosting the largest number of prominent science and technology clusters. Home to 24 clusters in the top 100, China overtook the United States with 21 clusters. In the past, China played a frantic game of catch-up in innovation, where it sought to narrow the gap with advanced economies by assimilating and refashioning advanced technologies developed abroad. But this playbook is from bygone days; the tables are turning now. While there is no room for complacency, China is fast shedding its skin as a behind-the-scene producer and emerging as a high-tech creator.
Concluding remarks
While China is expected to have a modest cyclical rebound in 2024, it must eventually resign itself to a more sluggish growth rate between 3% and 4%. It is patently clear that China’s economy is at a critical juncture and by no means out of the woods. Once a stalwart of the Chinese economy, the battered property sector is, however, showing some tentatively promising signs that it is ever so slowly on the mend. As China continues to pivot to a consumption-based growth model in the years to come, innovation is likely to remain a recurrent theme in its economic narrative. The shift from manufacturer to innovator will herald a turn in China’s fortunes defined by technological prowess.
Akin to a majestic dragon with its fiery breath, China has been roused from a light slumber. It is ready to take on the formidable challenge of infusing new life into its own economy, igniting a resurgence that will fuel global economic growth.
