At a moment when the National People Congress is meeting, the government has confirmed for this year its growth objective around 5% but has not yet announced special rebounding economic measures, which gives rise to some skepticism among Western observers. They notice that this figure is quite low compared to the growth, frequently above 7%, obtained during the decades before the covid-19 crisis. It will be moreover difficult to reach it because the 5% obtained in 2023 was benefiting from a favorable basis effect due to the end in 2023 of the restrictions occurred to fight against the pandemic.
China is confronted with a major dilemma. The country lives under a communist regime which is very strict regarding public freedoms and political institutions. But it had known an exceptional economic development accepting capitalist economic practices and frequently liberal ones. Big public enterprises cohabite with private listed companies which have reached market values near these we find in Japan and in Western countries. Their founders have accumulated huge fortunes and have sometimes been the purpose of legal proceedings or have had to live in exile. But the increase of the Chinese population level of life has been so high these last decades thanks to growth that a return to the past, before the economic reforms, is not considered by the country political leaders.
The comparison between past and current growth rates, which is at the origin of the skepticism about the country is not appropriate because the today 5% increase of the production corresponds to a created wealth much larger than a 7% GDP increase generated ten years ago. The true debate would be about China ability to reach now this 5% objective. Observers so expect the adoption of the same kind of economic policy measures which are used in the traditional capitalist countries, a more expansionary monetary policy and a support of the internal demand in favor of household. They have been until now disappointed and the messages delivered during the Congress by the Prime minister have not answered to their expectations.
The Chinese economy is facing two immediate difficulties and a worry about long-term trends. The major real estate crisis which has sent into bankruptcy two among the largest property companies results from an excessively optimistic strategy about the situation of the demand. It will so have a downward revision about real estate investments but these two bankruptcies will not put into danger the country financial equilibriums because the authorities have the resources and they have already started to implement it to take in the consequences of these failures on the banking system.
The second factor which weight on growth is the very high level of the household financial savings which reflects a true worry regarding the future and which weight on the domestic demand. Lastly, the consequences of the one child policy start to appear and it is not possible to avoid to compare China with Japan whose population declines year after year.
This consumption weakness goes along with a structural change in favor of services. The figures of the travels during the Lunar New Year holidays are testifying of that because the number of travels inside and outside the country have by large overpassed the level reached before the pandemic and nothing allows to thinking that this trend will reverse itself in the future. That will have consequences on the Chinese industry which starts to face overcapacities, which is a worrying point.
The transformation of the industrial model so is unavoidable and the end of China as “the factory of the world” is definitive. Enterprises will enter into a third phase. At the origin, they have had a sub-contractor vocation, the American and European companies de-localized a part of their activities to profit from a low-cost and qualified workforce. The construction of infrastructures allowed the components to easily travelling toward assembly lines in Europe and even in the U.S.
Along with their upgrading, these companies became also clients and bought the necessary production tools, to the highest benefit for the German industry. Internal demand increasing, many international groups, in the car industry, electronic and even aeronautics invested in China to satisfy the market in an economy which was becoming the second most important in the world after the U.S.
After having been sub-contractors and after clients, the Chinese companies are becoming competitors for the Western and Japanese groups with their know-how, their brands and a large domestic market. Current overcapacities problems could so be solved with the development of exports as in the car manufacturing. China became in 2023 the 1st exporter in the world with 4.9 million vehicles (+47%). The country takes profit from its leading position in electric vehicles. BYD has so exported 250 000 vehicles with a 330% rise. In aeronautics, the narrow-bodied C919, conceived and produced in China, has been one of the stars of the Singapore Airshow. The emergence of Chinese world leaders in several sectors is an acquired fact the European will have to take into consideration. They will be them, their major competitors in the future.
The energy transition with huge investments in nuclear and renewables will also constitute a support to the country growth and to the strengthening of its industry. The Chinese manufacturers of wind farms and solar panels already have world markets share respectively of 50 and 80%.
Chines exports will not be limited to developed countries. The so much criticized in Europe “New Silk Roads” program has allowed to building transportation infrastructures allowing to carrying the Chinese products all around the world along with supporting the level of life increase in the related countries, which will generate for the country new customers.
At last, the accumulation of external surplus, with a current account balance in 2023 of 4% of GDP, allows China to avoiding foreign investments or international financings in the case of internal difficulties as it happened in the real estate sector. Comparisons between growth rates from one period to another do not so have a lot of significance. It is better to look with lucidity, at the changes inside international competition the Chinese economy evolution is going to bring and which the geopolitical tensions with the U.S. will not put into question.
The Chinese market will remain highly important in the years to come. But it will have two ways to tackle it :to continue with the current way when the enterprise has at its disposal known brands and goods and services corresponding to the Chinese consumers demand or to find the good local partners, on an equal basis, in order that both of them take profit of the other one know-hows, for regarding the access to the markets as much building competitive production tools. It is at these conditions that the foreign companies will be able to take advantage of the continuation of growth in China, which doesn’t make any doubt.