The seven trends that will define China in the 2020s

Against multiple headwinds, China’s trajectory is unlikely to be smooth. Notwithstanding major changes, the following realities are likely to define China in the new decade.

First is a tectonic collision on all fronts with the United States. The China scare is reaching a crescendo. This is powered by such thinking as Peter Navarro’s Death by China (2011), Michael Pillsbury’s The Hundred-year Marathon: China’s Secret Strategy to Replace America As the Global Superpower (2015), Elizabeth Economy’s The Third Revolution: Xi Jinping and the New Chinese State (2018) and Robert Spalding’s Stealth War: How China Took Over while America’s Elite Slept (2019).

There is a solid bipartisan consensus that a powerful yet authoritarian China, if left unchecked, would compromise, if not usurp, American leadership of the liberal world order.

Few countries have the luxury of splendid isolation. US allies are being cajoled into adopting a united front. Others are hedging, unprepared or unwilling to take sides in a world becoming inextricably interconnected and interdependent.

Whosoever is in the White House, robust across-the-board pushback against China is likely to continue, if not intensify, while China doubles down and defends its ambition to realise its “two centennial goals”: to become a moderately well-off nation by 2021, the centenary of the founding of the Communist Party of China; and to become a “strong, democratic, civilised, harmonious and modern socialist country” by 2049, the centenary of the founding of the People’s Republic of China.

The coming decade will see no lack of flashpoints between the two rivals that might be ignited. These include the South China Sea, Taiwan, Hong Kong, Xinjiang, Tibet, the military and cybersecurity.

Second, China’s slower economic growth is likely to slide into a range of 5 to 6 per cent annually. While China’s lower growth figure in 2018 was equal to Australia’s entire economy, contributing about 30 per cent to global growth, Chinese economic momentum driven by infrastructure, housing and exports is reaching a plateau. Newer growth engines, services and consumption, take longer to mature.

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Pressures to sustain economic stability will increase, with worsening demographics, mounting debt, state-owned enterprise inefficiency, continuing conflict with the US, and other disruptions. In any case, with a larger base, a more moderate growth rate is bound to ensue.

Third, thanks to denial of access to the US’ advanced technologies, China is accelerating the development of “Made in China 2025” technologies. Milestones to watch include 5G, artificial intelligence, advanced robotics, next-generation information technology and new energy vehicles. These are critical to China’s ability to leapfrog the “middle-income trap”, safeguard national security and achieve its centennial goals.

Fourth, the rest of the world is likely to become more dependent upon China’s economy than vice versa. According to a McKinsey Global Institute report, China’s economy is rebalancing towards domestic consumption. This contributed 76 per cent of China’s GDP growth in 2017 and 2018, while net trade made a negative contribution.

China’s consumer markets are heavily integrated with the world. Across 10 large consumer categories, multinational corporations’ average penetration in China was 40 per cent in 2017, compared with 26 per cent in the US.

Meanwhile, the intensifying trade war has pushed many manufacturing operations from China to other developing parts of the world. These require medium technology and intermediate goods from China, as China accelerates vertical integration.

According to Natixis, a French bank, China’s vertical integration is leading to less dependence on value chains in Asia, the European Union and the US. China is importing fewer intermediate goods from advanced countries, but exporting more intermediates for them to re-export.

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Fifth, a decade of the Chinese consumer is unfolding, driven by burgeoning consumption in inner provinces and among baby boomer retirees, according to “Imagine 2030”, a Deutsche Bank report. A powerful catalyst is China’s dynamic e-commerce and e-payment systems, the world’s largest.

Additionally, to achieve economic rebalancing, domestic consumption remains at the top of China’s policy agenda. China’s share of world consumption jumped to 12 per cent in 2018 in dollar terms, or 14 per cent if adjusted for purchasing power parity. This puts China on track to become one of the world’s largest consumer markets.

Sixth, China is likely to become a green superpower. According to a report published by the Dutch company Elsevier, China should be able to achieve 26 per cent renewable energy by 2030.

A report by Energy Transitions Commission and Rocky Mountain Institute finds that China is well positioned to attain carbon neutrality as a fully developed economy by 2050.

China is already the world’s largest producer, exporter and installer of solar panels, wind turbines, batteries and electric vehicles, followed by Japan, Germany and the US. China accounts for 150,000 renewable energy patents, about 30 per cent of the world’s total, far ahead of the US (100,000), Japan (75,000) and the EU (75,000). China has the largest high-speed railway network, with more than 30,000km (19,000 miles) of track, compared with the US (less than 800km, or 500 miles).

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While air, soil and water pollution remain serious problems in China, the country is embracing greener growth with a vengeance. Great strides are expected in the coming decade.

Seventh, against rising protectionism, China is pushing ahead with extensive regional and transnational integration through economic and infrastructural links. This includes initiatives like the Greater Bay Area, the Regional Comprehensive Economic Partnership and the Belt and Road Initiative.

According to its National Development and Reform Commission, China’s cumulative trade with belt and road countries surpassed US$7 trillion in 2018, with investment of more than US$30 billion.

China-Europe freight trains connect Chinese cities to 49 cities in 15 European countries. As of 2018, China had signed 171 cooperation documents with more than 150 countries and international organisations.

A Belt and Road international science alliance was established in 2018, building technology transfer platforms and science parks with Southeast and South Asia, the Middle East, Central Asia, central and eastern Europe.

The involvement of the World Bank and the Asian Infrastructure Investment Bank will help address accusations of “debt traps”, adverse ecological impact, lack of transparency and inadequate benefits for local communities.

Modern China has a turbulent history. The new decade is likely to be a watershed, for better or worse.

Andrew K.P. Leung is an independent China strategist