China’s economic development is a unique success story. With 1.4 billion inhabitants and a Gross Domestic Product (GDP) growth of USD 12.8 trillion in 2017, China is today the world’s second largest economy after the United States, and is increasingly playing an influential role in the global economy. This report looks at the key aspects of China’s current and future growth, highlighting the sizable opportunities it offers to international investors.
The structural case for China: Towards more qualitative and sustainable growth
China “new normal” economy
After high-speed economic growth in the past three decades, the Chinese government has embraced slower economic growth, referring to it as the ‘new normal’, which not only aims at quantitative but also qualitative and sustainable growth.
China’s GDP growth in 2017 was 6.9% (significantly higher than the government’s initial target of ‘around 6.5%’ growth), led by continued strong public infrastructure investment, solid consumption growth and improving foreign demand. China’s Q1 2018 GDP growth came in at 6.8% YoY. The annual growth target in the 13th Five-Year Plan (2016-2020) has been set at 6.5% (vs. 7.0% target in the 12th Five-Year Plan 2012-2017)).
The government’s revised growth target reflects the economic rebalancing and the increasing focus on the quality of growth, while still maintaining the objective of achieving a ‘moderately prosperous society’ by 2020, though doubling GDP over the period from 2010 to 2020. The government aims at putting China’s growth on a more sustainable path than before.
The government acknowledges the need for China to embrace a new growth model that relies less on fixed investment and exporting, and more on private consumption, services and innovation to drive economic growth. This implies as well structural reforms that China has to undergo to address challenges arising from the past high-speed growth. Building a balanced and efficient financial system is also key to support real economy. The new economy transformation centers on:
- supply-side and mixed ownership reform,
- investment to consumption growth model,
- industrial upgrade “Made in China 2025”
- new sectors (green, TMT, technology, healthcare),
- “Chinese Inc. going global”, Belt and Road Initiative (BRI)
Despite its transition to slower economic growth, China continues to be the largest contributor to world growth since the global financial crisis of 2008.
Consumption: a crucial driver of China’s economic growth
From a production perspective, the tertiary industry, accounting for 51.6% of total GDP (vs. 44% in 2011, as shown in the below chart), grew at an impressive rate of 8.0% YoY in 2017, suggesting that the new economic sectors were gaining traction. The contribution from the secondary sector also rose quarter on quarter but by less than the services sector. In 2017, the growth rate for the primary and secondary industry sectors posted 3.9% and 6.1%, respectively.
From an expenditure perspective, net exports dragged on GDP growth by 0.5 ppt in Q1 2018, continuing a trend of negative contribution to GDP growth since 2009. This underscores our argument that China had switched from export- led to domestic-led growth since the Great Financial Crisis (GFC). Within the domestic sector, total consumption contributed to more than three-quarters of GDP growth (vs. 45% in 2010), reflecting gradual expenditure-switching from investment-led growth.Download to read more