Mainland China could be approaching a turning point. Despite a tough year, the economy still expanded by a creditable 5.2% in 2023. At the recent National People’s Congress (NPC) session, the government set a growth target of around 5% for this year. As the government itself conceded at the NPC, getting to this target will not be easy. However, it is achievable; the cyclical factors causing the slowdown are likely to ease, while reforms can help ensure a decent enough pace of long-term growth.
One-off factors such as slower global trade and the real estate correction slowed growth in 2023, when consumers and businesses were also still impacted by the Covid-19 pandemic. These cyclical drags on the economy will probably improve this year, allowing a modest uptick in domestic demand just as external demand also revives.
The robust spending data over the holidays could not have materialised had consumers remained fearful
Property focus
The key factor will be the property sector. The downward adjustment in real estate-related investment has now progressed quite far, so it could bottom out this year. At the same time, government measures to support the better managed property developers and to calm the fears of home buyers should help as the year progresses. If, as is likely, the authorities can contain the financial distress that some large developers are suffering, then the worst of the property market drag could be over this year.
The other important factor is consumer and business confidence. Surveys show consumer confidence at very low levels compared with the pre-pandemic period. However, this seems to be improving; the robust spending data over the Lunar New Year holidays, especially on tourism, entertainment, food and drink, could not have materialised had consumers remained fearful. The budget for 2024 will be modestly expansionary as well, which should also help to stabilise domestic demand. Consumers will remain wary and still maintain high savings rates but some of that caution will ease over the year.
Chinese firms are adjusting to the new norm of lower potential growth and a new set of drivers
Business confidence is also poised to improve modestly. Chinese firms are adjusting to the new norm of lower potential growth and a new set of drivers. Companies that fed off the unsustainable property boom and the previous government focus on physical infrastructure are realising that they need to shift into new growth areas. These are in renewable energy such as solar and wind power, as well as in new energy vehicles and associated areas such as batteries.
The government’s drive to build self-reliance in strategic technologies such as semiconductors, artificial intelligence, robotics and bio-technology also offers new and sometimes very lucrative opportunities. As companies better appreciate these new opportunities, investment in the latter will grow and so help to offset the declines in real estate capital spending.
Productivity drive
The second set of factors that impacts the Chinese economy relates to long-term factors, in particular the fall in population and, consequently, workforce – as is the trend across most of East Asia.
The resulting decline in the workforce means that economic growth can only be sustained if productivity improves. And that requires more reforms, some of which are already happening.
With the right policies and incentives, China should be able to replicate some of its recent successes
One necessary approach is to make better use of the current workforce, especially the hundreds of millions of rural migrants in urban areas. As the current regulatory framework for migrant workers is reformed, their pay and skills should improve, helping productivity and domestic demand to grow faster.
The latest budget also continued to boost research and development spending. With the right policies and incentives, China should be able to replicate some of its recent successes such as electric vehicles, batteries and solar panels in other higher-technology sectors.
The cyclical slowdown should ease as the short-term factors that depressed growth turn around. The longer term drags on growth are not easy to overcome but a start has been made with reforms that can boost productivity. If reforms are sustained, this should enable economic growth over the next decade of around 4% a year – enough for China to generate an improving standard of living for its people.
