Understanding China’s economic evolution

After four decades of spectacular growth, China’s economic model is undergoing a seismic transition. The country can no longer rely on some of its longstanding growth drivers – such as real estate and infrastructure – and there are hopes that emerging innovative industries will power another wave of development.

The current state of the Chinese economy and its future prospects was the subject of a panel discussion at HSBC’s Global Investment Summit, where two prominent economists and a leading Chinese investor shared their views on the opportunities and challenges ahead.

After the pandemic, China reported its worst annual GDP growth for more than three decades – coming in at 3% in 2022¹. Although this bounced back to 5.2% in 2023, there remain concerns among international investors over whether China is still an attractive market for capital allocation.

This caution is not justified by the facts, said Dr. Fred Hu, Founder, Chairman and Chief Executive Officer of Primavera Capital Group. The size of the economy and its financial market makes China too large to overlook.

“It is very large in the global context,” he said. “For global investors who seek to build a global investment portfolio, how could you ignore China?”

That said, there are a number of factors that have weighed on growth in recent years. For example, the country imposed a rigid zero-covid policy, regulators introduced a range of new rules on the technology section, and there has also been a correction in the real estate market.

“It is easy to generate a long list of risk factors for China,” said Dr. Hu. But it is more important to understand the uncertainties and the risk-adjusted return, and capture opportunities in “rock-bottom” low asset prices in China today, he said.

China’s new economy includes a number of exciting new industries. One that stands out is green technology, as the country powers ahead with its energy transition.

“China has done exceedingly well in green technology. In terms of solar panels, wind turbines, lithium batteries, and electric vehicles, China is by far the world's largest producer, as well as the largest exporter,” said Laura Cha, Chairman, Hong Kong Exchanges and Clearing Limited, who moderated the panel.

There are however concerns in other countries that China is overproducing in certain green products – such as solar panels and electric vehicles. This raises the spectre of tariffs being introduced to curb its exports.

The rapid rise in production is a temporary phenomenon that is the result of China’s political economy, said Prof. Keyu Jin, Chinese economist and Economist and Associate Professor of Economics at London School of Economics.

“There's a lot of local government competition. Everybody wants to set up their EV shop. Everybody wants to do their own solar panels. So they expand all over China and they compete with each other,” she said.

But as government subsidies are phased out, only the competitive producers stay in the market now, said Prof. Jin.

Furthermore, how long-term demand develops will likely shape how what appears to be overcapacity is absorbed, as the world will need a large amount of renewable energy equipment to achieve the green transition.

The panel also discussed China’s advances in artificial intelligence, and there are expectations that it could help improve productivity. The country’s universities are producing a large talent pool of scientists and engineers with AI skills, while the private sector is making huge investments in research and development. Taken together, these two factors suggest that China will remain a leader in this new technology.

The final part of the discussion addressed the challenges facing the Chinese economy. One potential hurdle to further development is a reduced role for the private sector, at a time when state-owned companies are responsible for a large share of economic activity. More broadly, there are fears that China could be moving away from market-driven principles that have guided the country’s development in recent decades.

“If you want to go towards a more innovation-driven economy, you should allow the private sector to play a greater role,” said Nicholas Lardy, Nonresident Senior Fellow at the Peterson Institute. “There's been a lot of speechifying about supporting the private sector, but it hasn't yet been translated into observable, measurable public policy.”

He also addressed the challenge of demographics, as an ageing population threatens to reduce the number of workers over the coming years. By gradually raising the retirement age to similar levels seen in advanced economies, the impact from shrinkage of the labour force can be alleviated.

Overall, the panel remained optimistic towards China’s long-term economic outlook, given its strong economic fundamentals.

“I believe there is still very substantial potential for China’s convergence towards high-income levels of the United States and other countries. China today, measured in comparable prices, is at roughly 30% of the US level in terms of per capita GDP,” said Mr. Lardy. “So there's a long way to go.”