China’s future depends on it getting its microeconomics right

Macroeconomic stimulus provides only a temporary boost and amplifies economic shortcomings
China is no longer a bubbly market full of speculators paying stupid money for overpriced products. Businesses must change to prosper

Andy Xie

Published: 9:30am, 30 Mar 2024

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A Chinese export recovery, momentum from improving domestic tourism and a consumption boost could more than offset the drag from China’s deflating property sector and lift the economy by 5 per cent this year.

In the long term, as more Chinese companies advance from working for original equipment manufacturers to becoming OEMs themselves, they will revive China’s growth trajectory. Reviving the macro economy through upgrading the micro economy is the right path for China. Not repeating the 2008-style credit stimulus is the right policy. Macroeconomic stimulus would only achieve a short-lived growth spurt while amplifying economic shortcomings.

Last year, China achieved a moderate economic recovery of 5.2 per cent, below market expectations at the start of the year but much better than hoped for midyear. Exports were flat, held back by destocking after a buying surge in 2022.

China’s consumption recovery wasn’t as impressive as in other major economies in the absence of big government handouts to relieve pressure on pandemic-hit incomes. Given this, the 7.2 per cent rise in retail sales last year was decent.

Domestic tourism was a big surprise, with revenues more than doubling to about 4 per cent of the gross domestic product. The automotive sector was also a significant positive with output up by 9 per cent. The property sector was the main drag. Real estate under construction was down by 7.2 per cent in terms of floor space, with new starts fallen by over 20 per cent.

Amid negative market sentiment and as corporations report struggles, doubts have been cast on China’s growth statistics. The prices of iron ore, coal and oil, however, appear to back up the story of China’s moderate recovery. The expansion in electricity production can be verified by corporate data and the expansion in the auto sector by car registration statistics.

But while China’s 5.2 per cent annual expansion is supported by ample microeconomic data, the sense of difficulty among Chinese businesses is also real. The main reason is overcapacity.

Business sentiment can be positive with economic growth at just 3 per cent, as long as demand matches production capacity, which translates into a reasonable profitability. But when capacity utilisation is low, growth doesn’t necessarily mean profit. And because China’s overcapacity is significant and capacity expansion is still rapid, businesses are unlikely to get that positive feeling this year either.

For 2024, China’s 5 per cent growth target is realistic. The trade inventory cycle has worked its way through. That January-February exports rose 7.1 per cent year on year is a good sign. The 8.3 per cent increase in January-February electricity production suggests strong export growth in the months ahead; China’s exports are likely to grow by 10 per cent this year.

Domestic tourism remains strong this year and could grow by a further 30 per cent. It suggests a fundamental shift in consumer behaviour, which includes a crashing desire for property speculation and luxury goods such as bags and watches.

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Chinese consumer behaviour is maturing, becoming more like in developed economies, even as China’s infrastructural development makes erstwhile remote locations easily accessible. Domestic tourism can be a significant growth driver for China in the next few years.

Chinese international tourism, however, isn’t recovering as strongly and for good reason. For continent-sized countries like the US and China, the domestic tourism market is massive. Tourists poured out of China over the past two decades but they have had their fix. Now, they are better able to make favourable comparisons of domestic holidays against trips abroad, especially in offering value for their money.

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Chinese consumers are generally in good financial shape. The turn away from pursuing property for speculation can only mean a huge improvement in household cashflows. Since 2021, households’ savings deposits have risen by 40.2 trillion yuan (US$5.5 trillion) while debt rose by a much slower 9.4 trillion yuan. In the preceding decade of 2011-2021, the rise in household debt was nearly 85 per cent of the rise in deposits.

Many economists see households deleveraging as bad for the economy. But when people stop financial speculation and start tidying up their balance sheets, it is a good thing. A healthier balance sheet will support more sustainable consumption growth. The boom in domestic tourism shows that, when the product is right and for a reasonable price, demand will come.

The change in Chinese household spending behaviour is an opportunity for businesses that can come up with the right products. China is no longer a bubbly market full of speculators willing to pay stupid money for overpriced products. Businesses need to change to prosper, and this will mean a healthier economy in the long run.

China’s economic prospects are brighter than they appear

On the demand side, businesses need to cater to a more rational Chinese consumer. On the supply side, businesses must rise in the supply chain to add value and stave off competition with proprietary technologies and unique designs. Semiconductors, electric vehicles and renewable energy are sectors well on that path. Aeronautics and high-value-added ships are on the horizon.

China’s economic model had long been that of working for original equipment manufacturers, or OEMs. This led to a shortage of high-paying white-collar jobs. Tens of millions of graduates can’t find jobs that meet their expectations. But as China’s corporate sector climbs the global value chain to the top, Chinese white-collar workers will have the same opportunities as in other developed economies.

China’s economic future depends on upgrading at the microeconomic level. Its labour force isn’t expanding. Its infrastructure and cities have been built. It doesn’t need to pursue growth for the sake of it. Economic expansion is good only when it meets the higher expectations of the next generation in both consumption value and job quality.

Andy Xie is an independent economist