China’s not a fragile country on the brink of economic collapse

To President Xi Jinping, China’s domestic economy is confronting thorny crises unlike any it has experienced since the country’s implementation of “reform and opening” policies more than four decades ago.

China’s old growth model was driven by infrastructure investment, export-oriented and energy-intensive industries and the real estate sector. To have investment growth rise faster than economic growth is not sustainable in the long run. By abandoning its old growth model, China is determined to accelerate its transformation to an innovation-driven economic growth mode, focusing on the so-called “new quality productive forces”. 

The surge in exports of many Chinese-made tech products, such as electric vehicles (EVs), batteries and renewable energy products, is powering Chinese economic growth at home. Advancements by companies like Huawei, BYD, Baidu and Tencent are helping to boost China’s influence in the global economy. 

For example, BYD, a Chinese EV giant, surpassed Tesla to become the world’s largest electric vehicle manufacturer in 2023 in terms of total number of cars sold. China exported 1.20 million new energy vehicles (NEVs) in 2023, up 77.6 % year-on-year, which accounted for more than 60% of the global sales of EVs.

However, flooding the global market with Chinese-made tech products has exacerbated trade tensions with Western countries and some developing countries in the global south. These countries are accusing China of dumping its overcapacity into their markets, causing the collapse of related domestic industries and rising unemployment. 

According to a report titled “Next Frontiers for Growth” published in 2023 by the World Economic Forum, the installed renewable energy capacity increased by 510 gigawatts globally, with China contributing over half of that increase. Competitive Chinese-made wind turbines and solar photovoltaic panels have been exported to over 200 countries and regions.

With the significant increase in its research and development expenditure in recent years, China is now the fastest growing and most dynamic global market for emerging digital technologies and leading in patent applications. According to the 2024 Global Innovation Index of the World Intellectual Property Organization (WIPO), 26 Chinese science and technology clusters made it onto the list of the world’s top 100 science and technology clusters, marking the highest representation by any country. In addition, according to the Australian Strategic Policy Institute’s study, China leads in 57 out of 64 critical technological fields in the world (2019-2023).

Leveraging its world-leading internet population, China is experiencing rapid and large-scale deployment of emerging technologies, including quantum computing, advanced generative AI (artificial intelligence), the Internet of Things (IoT) and blockchain-based technologies.

China had hoped such initiatives would soften the blow of its painful shift from investment and export-led growth. Whilst China is quickly moving toward a high-tech economy with a flourishing tech sector, the country faces domestic economic slowdown and strong economic headwinds. 

According to data released by China’s Ministry of Finance, the national tax revenue collected from January to August 2024 was RMB12.11 trillion, down 5.3% year-on-year. The main reasons for the tax reduction reflect the downward pressure on China’s industry and its economy, especially the weak domestic demand and the ongoing crisis in the real estate sector which has caused much collateral damage for the past few years, in sectors ranging from cement and steel, construction to services.  

Consumer spending, which Chinese authorities have long identified as an important driver of growth, remains weak. Although China has jumped to become the second largest economy, in terms of per capita income it is still a developing country. The middle-income group accounts for about one-third of the population, about 400 million people, while there are more than 900 million people in the low-income groups, or approaching two-thirds, below that level. 

Compared with countries in the West with advanced economies, which have an urbanisation rate that is usually above 70%, China’s urbanisation rate is low, with a permanent population rate of 66%, while urban household registration is at 48.3%. 

Over 200 million of China’s migrant workers in urban areas do not yet enjoy the same public services as urban residents. Worse still, compared with increasing consumption, ordinary Chinese residents are more worried about the pressure of the so-called “three mountains” of education, medical care and housing. 

The domestic economic slowdown has hit not just consumer confidence but also incomes, as more people face layoffs and pay cuts. The thriving tech sector does not create sufficient jobs, in particular for the massive blue-colour migrant workforce and less-educated urban residents. 

Millions of college graduates joining the job market are struggling to find jobs amid poor prospects. In 2023, Chinese authorities suddenly suspended releasing youth unemployment figures when the numbers reached a record high point. China resumed release of the youth unemployment information this year. The number is still very high and alarming (18.8% in August for 16-to-24-year-olds, excluding college students), even with applying a new methodology that lowered the figures. 

Since the Chinese leadership decided to open China’s doors to the world and implement the policy of reform and opening up, China’s economy has experienced a rapid growth rate of about 10% for more than 30 years, but this kind of growth is coming to an end. China’s economy has been slowing down, having reached a high point in 2007.  

In the past, China relied on a large and young demographic dividend and high capital investment, brought about by high savings and investment rates, to support the rapid economic growth. At present, China is facing the triple challenges of rapid population ageing, a  declining labour force and a declining population. The demographic dividend that once supported China’s rapid economic growth has now been exhausted.

In 2023, more than 217 million people in China were over 65 years old, accounting for 15.4% of China’s total population, equivalent to 1 in every 4 elderly people in the world being Chinese. At the same time, the number of working-age people in China has continued to decline since 2012, with an average annual decrease of more than three million, and according to various projections, the proportion of working-age people in the total population will further decrease in the future.

For its part, China has downplayed socioeconomic concerns by asserting that Western media and politicians are “unilaterally exaggerating the problems and challenges of the Chinese economy”.

Nevertheless, China is not a fragile country on the brink of collapse. In 2023, China’s GDP grew by 5.2%, contributing more than 30% to world economic growth. As the world’s second-largest economy in market exchange rate terms, China still has one of the highest economic growth rates among the world’s major economies, with an increase equivalent to the total economic output of a medium-sized country in 2023. 

Just as it is unwise to bet on the decline of the US, never underestimate the resilience and growth potential of the Chinese economy. China has a domestic market with huge potential, and there is a vast space for internal development. The argument for the so-called “peak China” is short-sighted and wrong. 

First, China’s hybrid “state capitalism” system has undeniable strengths. On the one hand, the “whole-of-nation” approach to innovation can marshal almost unlimited state resources. On the other hand, the rise of China’s tech sectors is not only built on centralised control and planning, but also features ruthless local competition that produces global champions able to compete in the world market. 

Once Beijing decides to develop EV or any other new industry, regional governments scramble to offer subsidies and other support programs. Hundreds of companies jump in, although often resulting in huge waste of investment and resources. The Chinese system is costly but incredibly effective.

Second, despite all the talk about multinational corporations “decoupling” or “de-risking” from China, the reality is that few ever go down this path. China still offers a dynamic market of unmatched scale. To both foreign and domestic companies, the lure of the world’s second largest market is irresistible. 

China’s expanding middle class, bolstered by a large tech-savvy consumer base, has driven substantial demand for consumer purchases ranging from smartphones to tech-laden EVs. In the future, the stimulus for consumption growth is expected to be driven by consumption of things such as medical and health care, culture and entertainment and financial services.

Third, different regions of China offer economic diversity and internal vitality. The Guangdong-Hong Kong-Macao Greater Bay Area, the Beijing-Tianjin-Hebei economic area, Yangtze River Delta and Chengdu-Chongqing Twin-city Circle are economically dynamic and have great growth potential. 

Fourth, China also has reaped growth dividends from new technological revolutions such as digital technology and green transformation. China has a leading edge in developing digital technology and the green economy, and many Chinese companies are highly competitive. China has a huge pool of scientific and technological talents and therefore great potential for scientific and technological innovation, which can strongly support the development of an innovation-driven economy.

Taken together, these factors show that there are still conditions to support China’s economy to maintain a medium-speed growth rate of about 4%-5% up to 2030. However, proper management of the Chinese economy in these challenging times requires a paradigm shift of governance to an approach that is transparent, competent, less-discretionary but also non-interfering. 

Importantly, without commitment to the required domestic structural reforms, ranging from reform of the SOEs, finance, taxation, to the social system, China’s economy will not be able to achieve its economic growth target. Nevertheless, none of these reforms are easy. In fear of losing power and resources, China’s various powerful vested interest groups have long resisted these above-mentioned domestic reforms. 

The Chinese authorities need to be resolute in their determination to drive through the necessary but painful structural reforms. The recent announcements by the Chinese authorities of measures to delay the retirement age and the adjustment of the pension system, as well as of measures to expand the opening up of the financial and medical sectors in pilot Chinese cities, are encouraging moves in the right direction. Postponing the statutory retirement age can slow down the decline of the working-age population and maintain the momentum and vitality of socioeconomic development.

Hence, while challenges remain, these domestic structural reforms are vital for sustaining China’s economic growth and enhancing its global competitiveness, allowing China to navigate a shifting global landscape more effectively.

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