Why China’s economy will continue to grow

While there are issues to be dealt with, the nation’s economic fundamentals are still sound and Beijing has ample room to adapt policies
The country’s industrial development, meanwhile, will see it through the current property sector downturn and demographic headwinds

Weijian Shan

Published: 4:30pm, 22 Nov 2023

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The growth – or lack thereof – of the Chinese economy matters, not only to China but also to the rest of the world. China is now the main trading partner of more than 140 nations and regions. Its share of the world economy is about 18.5 per cent, and it is expected to contribute about 35 per cent of global growth this year.

While China is expected to meet its 5 per cent growth target for 2023, economic, geopolitical and demographic challenges have raised questions over whether growth can be sustained. The property sector slump has been the biggest drag on the economy since 2022, and the road to recovery from the pandemic lockdowns has been bumpy.

There are signs, however, that the country’s property woes might be tapering off as the sector’s negative contribution to gross domestic product growth has narrowed from about 4 per cent in 2022 to less than 2 per cent. Despite many challenges, China will meet its growth target because it has “quite a bit of policy space”, in the words of US Treasury Secretary Janet Yellen, to help achieve it.

Unlike many other countries, China is not experiencing significant inflation. Its consumer price index in October fell by 0.2 per cent compared to a year earlier. The prevailing lending rates hover around 4-4.5 per cent. Therefore, the real interest rate is still higher than in the US and Europe, where rates must be kept “higher for longer”.

The average ratio of cash deposits China’s banks must park with the central bank is about 7.5 per cent, compared with a 0-1 per cent range for advanced economies. Therefore, China has much room to ease its monetary policy.

China is also in a more favourable fiscal position. It has a positive financial net worth whereas others, such as the US and Japan, are deeply in debt. The debt-to-GDP ratio of the Chinese government – including the debt of local government financing vehicles – is about 110 per cent, whereas the ratios for the Japanese and US governments are about 260 per cent and 120 per cent respectively.

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The equity value – assets minus liabilities – of China’s state-owned assets represents a greater percentage of its GDP than all government debt. This does not even count the value of its vast land resources. Therefore, China has plenty room to expand fiscal policy.

So if the property sector no longer drives growth, what will? According to KKR, a private equity firm, the green economy and digital economy contributed 4.7 per cent to China’s 2022 GDP growth rate. This more than offsets the 3.7 per cent contraction brought about by the faltering real estate sector.

China leads the world in industries representing the Fourth Industrial Revolution – green energy, digitalisation, industrial robots, artificial intelligence and so on. In industries such as solar and wind power equipment, civilian drones, mobile phones, high-speed trains, lithium barriers and robots, China’s global market share exceeds 50 per cent. China has also become world’s largest exporter of electric vehicles.

Even the long-running US-China trade war has not dampened this growth. US-China trade reached an all-time high of about US$700 billion last year. Indirect exports from China to the US via third countries have also surged. In Southeast Asia and India, for example, exports of final products to the US have grown in lockstep with imports of intermediate products from China.

This pattern reflects the deepening of China’s manufacturing as it moves towards higher-end products and becomes even more embedded in the global supply chain. In 2019, China’s added value to iPhones represented only about 4 per cent of their retail value. That has climbed to 25 per cent.

The US has also banned hi-tech exports to China such as advanced semiconductor chips. Such restrictions will hamper China’s technological capacity in the short term, but in the long run it will not stop its technological progress. China now has a strong technological and manufacturing base, a large talent pool, ample risk capital and a massive market, all necessary conditions to catch up and take the lead in any area of technology.

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China rivals the US as a global leader in R&D spending. It files more global patents per year than the US, Europe, Japan and South Korea combined. Paradoxically, hi-tech sanctions have induced an acceleration in technological progress in China, including breakthroughs in semiconductors, quantum computing and even AI chips.

The generally accepted position is that China’s long-term growth will be stifled by its demographic headwinds as its population ages and shrinks. While the size of China’s working-age population peaked in 2012, its GDP has more than doubled in the 10 years since. China’s research and development spending and productivity increases set it apart from other developing economies mired in the “middle income trap”. Its labour force is currently underutilised, and there will be no labour shortage in the foreseeable future as the country continues to automate and urbanise.

China does face economic challenges. Business and consumer sentiment is weak, and confidence is low. The economy is underperforming. It will take a few years of policy stability and support for the private sector to fully regain confidence. But China’s economic fundamentals are sound, its government has substantial policy space and its industrial development has positioned it well for the future. Therefore, China’s growth will continue in the foreseeable future.

Weijian Shan, whose books include Out of the Gobi, Money Games, and Money Machine, is chairman and CEO of PAG, a leading Asia-focused private equity firm. This article is adapted from a speech at PAG’s 2023 Investor Conference on November 8