Policy easing can boost growth
China’s ‘new normal’ is emerging as economy stabilizes after pandemic
Helped by incremental policy support, China’s GDP growth is likely to be in line with the “around 5 percent” growth target. Looking ahead, we at UBS Global Wealth Management expect GDP growth in 2024 to settle in the mid-4 percent range as the real estate sector’s weakness continues and the economic boost following the postCOVID-19 reopening of the economy fades. But more than 5 percent growth is possible if active policy easing continues, consumption recovery runs its full course, and the property market stabilizes.
In the longer term, China will enter a medium-growth period with potential GDP growth of 4-4.5 percent in the coming five to 10 years (compared with nearly 6 percent over the past decade and 10 percent in the early 2000s). But if the transition goes as planned, the Chinese economy’s sheer size means it could still contribute a third of global growth, with per capita GDP doubling to about $25,000 by 2035 (from $12,720 in 2022).
As the Chinese economy shifts to higher-quality development, new drivers are emerging to shape the nation’s growth path. Among these, we believe mass consumption, green transition, and industrial upgrading will be the key drivers of China’s growth in the future.
China’s middle-income group, the major force of domestic purchasing power, adds up to more than 400 million and will grow further as per capita GDP increases.
Some new trends have also emerged in recent years.
Consumers are focusing on domestic cultural products and services, evident in the rise of homegrown Chinese brands or guochao. Also, spending on services has quickly rebounded after the pandemic, while online shopping has registered doubledigit growth over the past five to 10 years. The silver economy, too, is set to shine.
Besides, China’s de-carbonization road map — peaking carbon dioxide emissions before 2030 and achieving carbon neutrality before 2060 — has created opportunities for green industries because the government has been scaling up the clean solar, wind and nuclear power capacity to ensure non-fossil fuels comprise 80 percent of the country’s energy mix by 2060 (from about 30 percent today). This has increased the demand for electricity storage facilities, needed to supply electricity without disruptions.
Backed by extensive government incentives and technology innovations, China is now by far the largest electric vehicle market in terms of both consumption and production.
When it comes to technology innovation and industrial upgrading, in response to the tightening of hightech restrictions by the West, China has been focusing on becoming selfsufficient, especially in chips, 5G, and artificial intelligence, among other advanced technologies. Besides, higher-value-added industries are emerging as China moves up the global value chains, with higher-valueadded exports (as a percentage of the global total) rising to about 22 percent in 2022 from a mere 3 percent before China joined the World Trade Organization in 2001.
But will China’s economy go the way the Japanese economy did in the 1990s? It should be noted that China today is at a much lower economic development stage than Japan was in the 1990s. While China’s per capita GDP today is a little more than $12,700 (about 17 percent of the US’), Japan’s per capita GDP in the 1990s was about $25,370 (nearly on par with that in the US). This means China still has a lot of catch-up to do, although its potential growth is arguably more buoyant than Japan’s in the 1990s. China also has a much larger consumer market with a middle-income group of more than 400 million people.
Given the Sino-US tensions, China has, on a priority basis, been reducing its overreliance on other countries to meet its strategic sectors’ needs and maintain the stability of the supply chains. Japan, on the other hand, signed the Plaza Accord, along with France, the then West Germany, the US, and the United Kingdom, in 1985 which caused the yen to sharply appreciate, which in turn led to a slump in its exports and the shifting of the auto supply chains to the US.
Yet China’s real estate sector (about 25 percent of GDP) and local government financial vehicle debt (about 48 percent of GDP) remain the two of the biggest risks. We do not foresee systemic risks, though, given the government’s policy support. Activity in the real estate sector is likely to gradually stabilize at lower levels, helped by a package of solutions including relaxing purchase restrictions and lowering down-payment and mortgage rates in the short term, as well as new investment in rural vitalization projects and affordable housing in the medium to long term.
As for local government financial vehicle debt risk, it could be alleviated through bank loan rollovers and debt swaps.