Wei Li is a lecturer in international business at the University of Sydney Business School.
Although recent data from China’s powerhouse real estate and export sectors have not lived up to expectations, we should not lose sight of the bigger picture, as Beijing’s economic revival strategy for the world’s second-largest economy encompasses more than these traditional pillars.
2022 was an exceptional year for the Chinese economy, with traditionally high-growth provinces experiencing an unexpected downturn due to strict COVID-19 lockdowns. Although the government had set an annual economic growth target of 5.5%, actual gross domestic product growth barely reached 3%.
Provinces including Zhejiang, Guangdong, Shanghai, Hainan and Beijing that usually lead the way recorded far from impressive performances, posting GDP growth rates of 3.1%, 1.9%, -0.2%, 0.2% and 0.7%, respectively.
This year marks the beginning of post-pandemic reopening, and the government’s chief focus is firmly set on expanding consumption. The Central Economic Work Conference last December said that “recovery and expansion of consumption should be given priority” and proposed a strategic planning outline for the expansion of domestic demand through 2035.
Recent economic data indicates that China’s consumer market is starting to recover from the impact of the pandemic. Offline service industries like domestic tourism that were severely affected from COVID have seen a swift rebound.
At 18.76 trillion yuan ($2.6 trillion), total retail sales for the first five months of the year grew 9.3% from a year earlier, and more recently have been expanding at a double-digit rate. Food and beverage sales were up 22.6% through May. In response to these encouraging signs, different areas of the country are launching new promotions to further stimulate activity.
After total car sales rose 8.9% in the first five months, China said in June that it would extend tax breaks for electric vehicles and other green cars until the end of 2027. The government is particularly interested in promoting sales of durable goods as part of its effort to spur consumption and stimulate factory output, with officials conscious of the lengthy upstream and downstream industrial chains involved with automotive and appliance production. Those two areas made up just under one-third of all retail sales last year.
The foundations for a consumption recovery this year remain robust. Last year, consumption accounted for 32.8% of economic growth, significantly lower than in recent years, when it was responsible for a majority of growth.
At the same time, household bank savings surged last year to a record 17.84 trillion yuan, up 80% from 2021, according to People’s Bank of China data. The figure was equivalent to more than a third of total household income. Before the pandemic, households were saving about a fifth of their income.
It is clear that a major hurdle for the Chinese economy lies in declining manufacturing output. Industrial profits dropped 18.8% in the first five months of the year from 2022 levels, largely due to high compliance burdens and the global slowdown in manufacturing sparked by weakened demand and elevated inflation.
Given this context, it is inevitable that infrastructure investment is taking center stage in China’s 2023 economic revival strategy. This effort can be expected to continue to prioritize industrial transformation and upgrading, specifically within manufacturing, and also to focus on advancing the transition to a low-carbon economy.
China is conscious of lessons from its infrastructure investment stimulus during the global financial crisis, which resulted in substantial property market bubbles.
On one front, there is a strong push to bolster traditional infrastructure, such as high-speed rail, expressways, airports, wind farms and water conservation initiatives.
However, the success of this strategy depends on the central government coming up with an urgent and effective response to the problem of existing local government debt. Some Chinese economists have suggested Beijing could issue special national bonds to backstop this debt, alleviating local governments’ financing burden and facilitating the smoother execution of new infrastructure projects.
At the same time, investment in new infrastructure, including 5G base stations and data centers, is also gathering pace. These strategic investments have spurred private-sector involvement in digital and clean energy technologies like battery storage. Dalian Rongke Power, a provider of energy storage solutions, raised more than 1 billion yuan in a funding round led by Legend Capital in April.
The focus on green energy is already bearing fruit in terms of China’s energy transition. A recent report by U.S. research group Global Energy Monitor projected that China could generate at least 1,200 gigawatts from solar and wind energy by 2025, effectively doubling its current capacity.
While 2022 was indeed a year marked by economic turbulence, it would be shortsighted to gauge economic recovery this year solely based on the performance of its real estate and export sectors. China’s determination to leverage a diverse range of sectors for its economic recovery demonstrates that there is more to its economic prowess than meets the eye.