How sustainability is driving China’s next economic transformation

Despite some progress, the Chinese economy still faces problems but these can be overcome with targeted stimulus measures and a focus on sustainable development
By framing China as a threat, the US risks impeding global sustainability efforts

Lub Bun Chong

Published: 5:30am, 18 Apr 2024

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There was some good news for China’s economy this week, with first-quarter gross domestic product (GDP) figures better than expected. However, structural and cyclical issues persist, and the consequences of policy missteps cannot be stressed enough.

Accordingly, calls urging China to boost confidence and consumption are well placed. However, doing so without addressing the underlying issues is akin to treating the symptoms, not the cause, of an illness – to use a Chinese medicine analogy.

China’s previous high GDP growth model served its historical mission well, but it has now become the underlying cause of the current economic predicament. The “prescription” requires a painful transformation to a new sustainable development model.

Many Western narratives red-flag China’s economic situation when, in fact, these are the side-effects of the transformation China initiated in 2014 by ushering in a “new normal” and ditching high GDP targets.

Resources that are not wasted on blindly chasing GDP growth are either conserved or judiciously utilised. China’s target GDP growth of around 5 per cent isn’t just due to a slowing economy, but is designed to maintain equilibrium in the efficient use of resources.

China plays the long game, and an appreciation of its history and sociopolitical dynamics is essential for a proper assessment of its economy.

People walk past a clothing store at a shopping centre in Beijing on March 20. Photo: AFP

The 75-year transformation of China, from an outcast communist state to peer competitor status with the United States, was achieved with a one-party political system anchored in stability and continuity. This is not readily comprehensible, and may even be disconcerting, to the US-led Western world.

China has undertaken countless cycles of transformation, big and small, throughout its 5,000-year history. In this regard, the ancient text of I-Ching (the Book of Changes) and the importance of change and harmony are deeply ingrained in the Chinese strategic mindset.

The last major cycle of change was China’s transformation from a state-planned to a market economy, which eradicated extreme poverty and delivered the “Chinese economic miracle”. However, this model also led to massive corruption, socio-economic imbalances and unrestrained environmental degradation.

Massive economic stimulus can boost GDP growth, but it’s a step backwards. Instead, the new development model deploys moderate stimulus measures to targeted strategic areas, such as the 15,000 water conservancy and disaster relief public projects being funded by China’s “ultra-long” US$139 billion bond.

A scooter rider passes residential buildings under construction in Beijing on April 2. Photo: EPA-EFE

China’s property market contracted after the “three red lines” policy – which restricted borrowing by developers – was unveiled in 2020. That came at a time when the clean energy sector was ready to pick up some of the slack in the GDP. This transition has been years in the making and, by 2023, clean energy contributed 40 per cent of China’s GDP growth, according to the Centre for Research on Energy and Clean Air.

However, problems persist. For example, more than 40 per cent of the attendees at a Goldman Sachs conference in Hong Kong in February said they believed China was “uninvestable”, according to a Financial Times article. Market reforms are required, but China only has just over 220 million individual stock investors, and there are other priorities such as looking after its rural population of 477 million.

China’s debt ballooned to a record 286 per cent of GDP in 2023. The immediate priority is to control the spillover. This is facilitated by the high level of domestic yuan-denominated loans and savings contained within a state-owned banking system.

The private sector is crucial for China’s middle-income economy. Yet, it’s at the wrong end of capital misallocation, a problem that is particularly acute for the grass-roots economy. China must follow through with action to unlock value in the private sector.

Workers pick tea leaves on April 7 close to a village of Jinhua, Zhejiang province, where companies and officials have also promoted ecotourism. Photo: Xinhua

China remains an ardent advocate of globalisation despite US and European Union “de-risking” manoeuvres. Its “dual circulation” strategy seeks to find a balance between internal “reform and opening up” and insulation against external risks. China’s new model is not an end but, rather, the means to achieve “common prosperity”, the wide-ranging, long-term pursuit of a fairer and greener society.

Beijing’s approach is uniquely “socialist with Chinese characteristics”, but this does not mean it is going back in time. In fact, the opposite is true as China forges a sustainable future while engaging with an increasingly multipolar world.

Seventy-five years ago, Mao Zedong led the founding of the People’s Republic of China. The world has changed drastically since then, and China has remained relevant through transformation. As International Monetary Fund managing director Kristalina Georgieva said last month, “we appreciate China’s continued support for our efforts [to tackle global problems]”.

The reality is that China is still growing. Unless the US stops framing China as a threat or challenge, it risks misreading China’s development path and impeding global efforts on sustainability.

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Philosopher Lao Tzu wrote about the virtue of harmony among men, creatures and the universe in the Tao Te Ching. This was around 500BC, predating the modern sustainability agenda by more than 2,000 years.

Engagement, not confrontation, is in China’s interest. Most countries are earnestly trying to balance their security and economic interests, a precarious task given the US’ resolve to remain at the top of the world order.

It falls to China to work with the G20 and Association of Southeast Asian Nations, and collectively allay legitimate US concerns by exploring common ground – starting with sustainable development. Clearly, this is easier said than done, but sustainability is an ideal way to bridge security and economic divides. As Lao Tzu said, “A journey of a thousand miles begins with a single step.”

Lub Bun Chong is a partner of C Consultancy and Helios Strategic Advisors, and the author of “Managing a Chinese Partner: Insights From Four Global Companies”