China’s central bank last month announced that minimum deposits for home purchases will be lowered in a bid to revive buyer interest. Minimum deposits will be cut by 5 percentage points – to 15% for first-time buyers and to 25% for second-home purchases – while individual provinces will also be free to determine minimum mortgage rates (rather than have them decided by Beijing).
Local governments were directed to acquire empty properties for affordable housing – which should help ease pressure on property developers’ finances, while reducing the imbalance in supply and demand. Investors have been crying out for more forceful government stimulus for a while, but it’s too early to say whether these measures will mark a turning point in China’s economic problems.
After all, the list of concerns is long. A beleaguered real estate sector; strained local government finances; deflation; rising youth unemployment; an ageing population; and geopolitical tensions, are just some of the issues.
For many casual observers it’s a case of ‘Game Over’ – China’s best years are behind it. But these commentators who’ve declared that we have reached ‘peak China’ really need to think again. Here’s why...
Economic powerhouse
Growth has slowed. But even at a more modest 5% annual growth rate, we’re talking about the world’s second-largest economy expanding each year at a pace which adds Poland’s gross domestic product (GDP).
Last year, in addition to the existing superlatives, the country quietly became the world’s largest vehicle exporter, largely because of its dominance of the global electric vehicle (EV) market.
Admittedly, consumer confidence is low right now – damaged by the legacy of some of the world’s most draconian Covid-lockdown policies, as well as big falls in property prices.
But the economy is expected to account for almost a quarter of global consumption by 2050, when the country’s consumer market may be some 10% larger than the US’.
Even if China’s pivot to a consumption-led (rather than investment-intensive) growth model is gradual, we still expect it to be the world’s dominant consumer market by the early 2040s. 1
Technological clout
China is betting big on the new technologies that will shape the world in the decades to come. There are many signs that it’s making headway.
It’s a leader, by some margin, in green energy technology. Last year it commissioned as much solar photovoltaic capacity (aka solar panels) as the rest of the world did in 2022. China accounts for almost 60% of all the new renewable energy capacity that’s expected to become operational by 2028. 2
The country accounts for some 50% of global EV production and exports. EV production represented some 30% of domestic automobile production in 2023, up from 5% in 2019. 3
More than a quarter of the world’s top 1% most frequently-cited scientific papers are Chinese, and its research accounted for a high proportion of studies into areas such as materials science, chemistry, engineering and mathematics.
China is also in the top three countries for artificial intelligence (AI) activity such as investment, research, and development, according to research by Stanford University.
Older but wiser?
The population is ageing fast. This is a demographic problem that many economies – both developed and emerging – are facing.
That said, China has considerable scope to stay competitive, despite its shrinking workforce. Demography needn’t be destiny.
Relatively low incomes mean there’s still potential for many workers to retrain and move into more productive jobs in manufacturing and services. Companies can tackle their worker shortages by adopting new technology and processes.
Education and automation will help China offset demographic headwinds. While there’s little policymakers can do to improve workforce quantity, improving workforce quality is a route forward.
Final thoughts
China is too big and too important. That’s because of the outsized role the country plays, and will continue to play, in the global economy, as well as its massive investment in the technologies expected to shape the coming decades.
Clearly, the challenges are formidable. To the outside world, China’s escalating rivalry with the US is perhaps the most visible.
But here again, despite all the talk about the retreat of globalisation, the two countries retain complex economic and financial ties that are too complicated to unravel completely.
For example, take the issue of ‘reshoring’ – bringing production of goods and components back home, or closer to home, on security grounds.
Reshoring to date, in many cases, still relies on China as the primary source of production – even if ‘Made in China’ has officially changed to ‘Made in Asia’ or ‘Made in Mexico’.
What’s more, while some parts of the world have grown more hostile towards China, other fast-growing regions – notably Southeast Asia, the Middle East, Latin America and sub-Saharan Africa – remain open for business.
Focusing only on China’s problems and writing it off risks missing the bigger picture. This isn’t ‘Game Over’ – someone’s just hit the ‘Pause’ button. There’s still everything to play for.
1 abrdn, February 2024
2 abrdn Sustainability Institute, February 2024
3 Haver, abrdn, February 2024