Chinese economy has been on the spotlight following the slew of stimulus measures announced to spur the country’s economic growth. The pace of China’s economic expansion has slowed down since 2017 driven by trade and geopolitical conflicts, real estate market bubble and high unemployment. The recent economic reforms have renewed hopes of economic recovery in the short-term however structural reforms are awaited to improve the long-term prospects.
Prior to the initiation of economic reforms and trade liberalization in 1980s, China’s economy was relatively isolated from the global economy. However, since the relaxation of foreign trade and investment policies in 1980, China has been among the world’s fastest-growing economies with real GDP growth averaging 9.6% from 1980- 2017.[1] China has emerged as a significant economic powerhouse as its share of global GDP overtook the share of the U.S. in PPP terms since 2017. China's low cost of labour and fast-paced technological progress made it internationally competitive in manufacturing and fostered the country’s growth as a global trading power and export powerhouse. The inflow of FDI brought in new technologies and eventually technological development began to converge with developed economies like the U.S. China's value share[2] in the global manufacturing industry surged from 19% in 2010 to 34% in 2023, playing a crucial role in the supply chain.[3] China’s share of global exports of goods rose from 6.5% in 2004 to 14.5% in 2023, surpassing the U.S’ share (8.7%) of global exports.[4] The country is the leading import market for six out of 10 world’s largest economies.[5] China has been a key driver of globalisation in the past two decades as major economies rely on China for basic materials owing to comparative cost advantage and strong technology base.
However, China’s economic growth since 2017 has been slowed down by rising trade tensions with U.S, geopolitical tussle over Taiwan, property sector crisis, reducing appeal as manufacturing base and the COVID-19 pandemic. The real GDP has grown at a slower rate since 2017, except for the post-pandemic boom in 2021. The volume of exports of goods and services has followed the same trend, emerging as a key challenge for the export-driven China economy. The Chinese economy has faced a myriad of external and internal headwinds that influenced its growth and trade dynamics in the last decade.
Evolution of China Economic Landscape
- The U.S-China trade dispute began in 2017 due to concerns that of U.S. intellectual property (IP). The China government introduced the “Made in China 2025” plan in 2015 to upgrade China’s high-tech industries such as electric vehicles, information technology and AI through government incentives and acquisition of IP rights to surpass U.S technological progress. The government directed policies to purchase technology and IP rights from abroad, increased pressure on foreign firms to transfer technology to do business in China. These measures raised concerns that China aims to decrease its dependence on foreign technology and dominate global markets. The U.S-China trade conflict almost marked the onset of geoeconomic fragmentation.
- In 2017, U.S subsequently raised tariffs by 25% on USD 250 billion worth of imports from China. In May 2024, the U.S. introduced a new series of tariff increases on Chinese imports to boost U.S domestic production, with tariffs on electric vehicles and medical devices witnessing a sharp increase. On the other hand, Europe has been reliant on China for electronics, textiles, plastics and base metals. The U.S’ stance on trade with China has exerted a significant influence on EU-China economic relations as the countries share their concerns regarding China’s state subsidised exports. In October 2024, Europe’s standard car import tariff was set at 10%, with Chinese EV manufacturers’ tariffs at 45%.
- The shifting economic landscape has initiated an era of ‘deglobalisation’ and ‘friendshoring’. The extended Covid-19 lockdowns in China which restricted industrial activity resulted in the breakdown of the most heralded China supply chains. The magnitude of the challenges led to countries like Europe developing domestic supply chain and further intensified the progress towards deglobalisation. Amid increasing China-U.S. trade and political tensions and China’s rising labour costs, a growing number of corporates are pursuing the China-plus-one business strategy to diversify their China business by moving operations to other countries. The U.S is mainly friendshoring Mexico, Vietnam, Indonesia, Malaysia, and India among other countries as a low-cost alternative to China. U.S. imports of tariffed items from China fell by 22.5% during 2016-2023 while imports from Mexico rose 56.6% during the period signalling the trend of friendshoring.[6] The U.S has reduced its imports of technology products from China and turned to Vietnam for procurement. The U.S’ imports of notebook computers from Vietnam doubled between 2017 and 2022, recording an increase of USD 800 million.
- The domestic economic challenges such as real estate property bubble and rising debt levels have contributed to China losing ground to other trading partners. The Chinese real estate sector has been facing a broader market downturn sparkled by the strict government regulations imposed in 2021 to control rising house prices followed by the default of Evergrande Group (the second largest real estate developer in China) and the crisis spread. The government has introduced a slew of measures since 2021, but the property market is yet to set pace with its rebound phase. Structural imbalances such as sluggish economic growth, high unemployment and wage stagnation have weighed down on market sentiment and extended the period of real estate bubble till 2024.
- Historically, China’s economic development has been built on debt. The credit provided to state-owned enterprises in the wake of the global financial crisis has led to mounting debt levels. Over time debt has risen relative to the size of the economy with debt to GDP ratio at 297% as of 2023.[7]
China changing course amid economic shifts and new technologies has resulted in an abrupt deceleration in Chinese oil consumption, with profound implication on the oil- dependent GCC economies. China has been the cornerstone of the growth in global oil demand accounting for 60% of the global demand in the past decade.[8] OPEC downgraded global oil demand growth for 2024 to 1.93 bpd in October 2024, down by 106,000 bpd compared to the September growth forecast. Chinese demand growth accounted for most of the downward revision driven by the rising prevalence of electric vehicles and economic slowdown. China’s oil demand growth was revised down to 580,000 bpd this year compared to 650,000-bpd expected in the September report. China oil demand is expected to have a considerable effect on the GCC oil production as China roughly accounts for 20% of GCC’s oil exports. The reduced oil demand from China could weigh on Saudi Arabia and Kuwait’s decision to unwind the voluntary OPEC+ supply cuts and the economy’s oil revenue. Any further weakness in China oil demand could require holding oil supply tight to provide a floor to oil prices.
Expected growth in oil demand of major economies (%)
In September 2024, the Chinese economy unveiled fiscal and monetary stimulus package to support the economy and tumbling real estate sector. The monetary stimulus focused on lowering borrowing costs, injecting more funds into the economy, and easing households' mortgage repayment burden. The People’s Bank of China (PBOC) cut its reserve requirement ratio by 50 bps in September and freed up about 1 trillion yuan (USD 142 billion) for new lending. China lowered its main benchmark lending rates by 25 bps and the one-year loan prime rate was reduced to 3.1% in October 2024. The China Central bank has indicated that the reserve requirement ratio could be cut by another 25-50 bps by the end of the year to boost liquidity. On the fiscal stimulus front, China plans to issue special sovereign bonds worth about 2 trillion yuan (USD 284.43 billion) this year. China intends to raise another 1 trillion yuan via a separate special debt issuance to help local governments tackle their debt problems. China’s National Development and Reform Commission has allocated 100 billion yuan for spending in the 2025 budget. According to the Institute of World Economics and Politics, China is expected to tap 12 trillion yuan in new debt for stimulus in 2025.
The stimulus measures have fostered positive investor sentiment on China’s ability to turn the economy around in the short-term. The stimulus-led economic recovery could have global implications and benefit commodity producers like Chile and Argentia due to rise in China demand for commodities. South Korea, home to key suppliers within China’s regional and global value chains, would likely experience higher demand for its industrial exports. However, additional stimulus measures, especially in the real estate sector might be required to strengthen the long-term economic fundamentals. Structural reforms to boost the long-term growth potential could generate greater positive spillovers for the rest of the world and mainly the oil exporting countries.