The road to finding new growth drivers for China

To achieve growth goals, China wants to stabilize real estate and infrastructure, while investing in production and technology.

Since 2000, China's average GDP growth rate has been above 8% per year, ushering in a period of significantly improved living standards and almost no more extreme poverty. Thanks to market opening and trade reform, China has become the second largest economy in the world in terms of size in USD and the largest in the world in terms of purchasing power parity (PPP).

However, China's impressive growth comes with imbalances in the economy. People do not spend much and mainly accumulate savings. This resource flows into real estate and infrastructure, which are two traditional growth drivers. Over time, the benefits from these pillars gradually decrease and even become difficult.

Construction of roads, bridges and high-speed railways causes the debt of local governments to increase. The real estate industry, which previously accounted for more than 20% of China's economic activity, has entered its third year of crisis.

According to the International Monetary Fund (IMF), the number of new construction projects has decreased by 60% compared to before the pandemic. In 2023, existing home prices decreased by 6.3% compared to the same period in 2022 in major cities.

An outdoor food stall in Beijing, China on January 12. Photo: Reuters

Despite the slowdown of these two traditional drivers, China still sets a growth target of about 5% this year, similar to 2023. To achieve it, officials intend to work hard to stabilize them. At the annual parliamentary meeting earlier this month, Prime Minister Li Qiang promised to transform the country's growth model and reduce risks in the real estate sector and local government debt.

Accordingly, Beijing wants to rationalize spending on infrastructure incentives. There will be no new subway lines in Harbin. In Kunming, phase 3 of the metro system has not been approved by the central government. In Baotou (Inner Mongolia), subway construction is also postponed.

With real estate, Beijing recommends that localities create a "white list" of real estate projects that state-owned banks can continue to finance. The government also focuses more on the low-cost housing segment subsidized by the state.

In parallel, Beijing now focuses on "new productive forces". Wang Huiyao, founder of the Center for China and Globalization, a Beijing-based think tank, said the term reflects the government's belief that the economy is digital, high-tech and transformational. Energy can promote growth.

Xiang Songzuo, Director of the Greater Bay Area Financial Research Institute and Former Chief Economist at Agricultural Bank of China, said the government wants a smooth, controlled growth process to avoid serious problems. can arise such as high unemployment rate and social unrest.

"They know the old drivers can no longer guarantee the economic future, so they are promoting investment in these new areas," he said.

To finance the policy of stimulating "new productive forces", the government plans to issue 1,000 billion yuan (nearly 138.3 billion USD) of long-term bonds this year. "There is consensus that the Chinese economy needs to continue to grow, with the structure and growth model needing to shift to the high-end segment," Mr. Xiang Songzuo added.

Previously, thanks to policy support, the streets of Beijing and Shanghai were filled with domestic electric vehicles from BYD, Nio, Li Auto and XPeng. Not only that, their solar cell manufacturing industry also makes the West wary. The country continues to want to assert its name in areas such as energy transition, artificial intelligence, digital economy and biotechnology.

But there are still challenges in powering new growth drivers. Overproduction in some industries could create trade disputes with other major economies, according to Le Monde.

Increasing production also requires domestic consumers to open their wallets more. However, after the real estate market became quiet, consumer confidence also declined, because about 70% of the country's household assets are in real estate. Statistics show that while production accelerated in January and February, at 7% compared to the same period in 2023, retail sales increased only 5.5%.

Louise Loo, China economist at Oxford Economics, assessed that the country's economic activity at the beginning of the year was basically stable. However, some strong factors may be temporary. The job market remains deteriorating. The national unemployment rate rose to 5.3% in February from 5.2% in January.

"Consumers are temporarily excited by spending related to the Tet season. But without additional large consumer stimulus this year, it will be difficult to maintain a strong spending pace," experts said.

To date, Chinese policymakers continue to pledge to deploy further measures to help stabilize growth, after steps taken since June had only modest effects. However, analysts warn that Beijing's financial capacity is currently limited and believe that Mr. Li Cuong's speech at this month's National Assembly meeting has not created confidence for investors.

This weekend, the Chinese Ministry of Commerce said foreign direct investment in China in the first two months of the year reached 215.1 billion yuan (29.88 billion USD), down 19.9% ​​over the same period in 2023, continues a downward trend that began after growth slowed due to a prolonged real estate downturn and weak domestic demand.

Some economists say China risks falling into a period of stagnation like Japan's by the end of the decade, unless authorities reorient the economy toward household consumption and allocate resources accordingly. market.

Zichun Huang, China economist at Capital Economics, expects economic momentum to improve further in the near future thanks to favorable winds from stimulus policies. "But this recovery is likely to be short-lived due to the economy's underlying structural challenges," he said.