The next wave of Chinese growth drivers

The Chinese economy is undergoing a fundamental transition. It is moving from a growth model that prioritised real estate and infrastructure construction to a more diversified model that emphasises innovation and a greater role for ‘New Economy’ sectors. This is an ongoing, multiyear process that will put the Chinese economy in a stronger position to thrive over the coming decades.

In the second quarter of 2024, the Chinese economy grew by 4.7%, slightly lower than the government’s full year target for a 5% expansion¹. Although the country faces many headwinds – such as a weak property market, soft domestic demand, and trade tensions with other major economies – there are growing hopes that new growth drivers will come to the fore and sustain growth.

Innovation-powered growth

There are a wide range of innovative sectors that have the potential to make a significant contribution to China’s future growth. Take sustainability for example, the country accounts for more than 90% of the world’s production capacity for solar glass²; and when it comes to electric vehicles, passenger vehicle penetration is already above 30% and forecast to rise to 90% by 2030³.

Another area where China is showing signs of strength is Generative AI (GenAI) – the hottest topic in technology right now. The country’s tech titans already have comprehensive ecosystems, with huge user bases, which can be used to leverage GenAI use cases across their business. By 2026, GenAI could prove to be a USD 10 billion market, driven by demand for cloud computing⁴.

Digital finance is a promising ‘New Economy’ sector, as China’s widespread adoption of mobile payments and online lending makes FinTech set to emerge as a driver of broad financial inclusion. Looking to the longer term, improvements in automation could help alleviate pressures on the labour force from the ageing population.

Despite the enormous potential of the New Economy, it is worth remembering that it is still small when compared to the so-called “Old Economy”. This means that the government will likely continue to support traditional growth drivers, such as property and infrastructure, creating time for newer sectors to reach a scale where they can make a significant contribution to future growth.

Going global

Chinese companies are looking overseas for opportunities in new markets. This ‘going global’ trend not only reflects China’s growing competitiveness in goods higher up the value chain, but also the relatively subdued domestic demand in the home market.

International business can take the form of increased imports from China, or direct investment in foreign countries to create a new subsidiary. The benefits go two ways: Chinese exports are strengthened in their contribution to overall growth, while the target country gets cost-effective imports and local employment opportunities.

The data suggests that ‘going global’ has a long way to run. In aggregate, only 10.3% of revenues of the CSI 300 in 2023 came from overseas, compared to the 18.9% share of exports in overall GDP⁵. Comparisons with the main indices of export-dependent economies, also show that China’s overseas revenues in listed companies is relatively low. For Japan’s Nikkei 225, sales from overseas account for 35.3% of the total, and in the FTSE Germany index 78.8%.⁶

Geopolitical tensions could hinder the international efforts of Chinese companies. Electric vehicles are a case in point. Battery-powered cars look set to become a major Chinese export, meeting international demand for affordable high-quality cars.

Not all markets are receptive to these goods. The EU has already set tariffs on Chinese electric vehicles, going as high as 37.6% for some manufacturers⁶. Trade barriers in developed markets could mean emerging markets, such as Southeast Asia, could become a greater focus for Chinese carmakers.

Reform agenda on track

On the policy front, the most recent news came from the Third Plenum of the 20th CPC Central Committee. Held in mid-July, this quinquennial event brings together China’s top leaders to plan the course of the country’s social and economic policies over the medium to long term.

The key themes to come out of the Plenum provided a high-level overview of the reform plans over the coming years, reiterating the goal to become a “high-level socialist market economy by 2035”. The event’s communique emphasised the need for high-quality development, support for innovation, the management of risks from government debt and the property sector, as well as further fiscal reform.

From a near-term perspective, the Plenum maintained the need to achieve the 2024 growth target, while addressing the challenges brought about by the soft domestic consumption. Over the long term, it highlighted how consumption, technology and green development all remain key strategic directions, while at the same time emphasising the need for the market mechanism to take a greater role in resource allocation.

China Conference 2024

With a constant flow of developments taking place at both the macroeconomic and sectoral levels, it is important to keep track of the changes in the Chinese economy. There are also geopolitical factors that need to be taken into consideration.

The challenges, as well as the opportunities in China will be the focus of HSBC’s 11th Annual China Conference – a major event that will take place from 2 to 3 September in Shenzhen, bringing together a wide range of subject experts to discuss the need-to-know trends in the world’s second largest economy.

For more information, please contact your HSBC representative.