- With its real estate and foreign investment engines sputtering, China desperately needs new drivers of growth. The real estate sector has gone from hero to zero since mid-2021: We estimate real estate development has been -26% lower than its pre-pandemic trend. But the long-term perspectives are also grim with a rapidly aging and shrinking population and slowing urbanization. Meanwhile, foreign investment into China has started to soften for short-term tactical reasons, but long-term structural factors such as slower growth, regulatory barriers and worsening geopolitics are also reducing the economy’s attractiveness to foreign investors.
- On the bright side, exports are still going strong as China remains a critical supplier to the world. Although exports will not be one of the main drivers of growth anymore, China’s role as a critical supplier seems unchanged. The number of imports for which China is a critical supplier has been increasing over time and across the world’s major importers. The intensity of critical dependencies on China varies across importers, with the US being the most exposed: nearly 50% of its imports from China are critical dependencies. Furthermore, a shift in concentration of critical dependencies towards higher value-added sectors is clearly visible, especially when it comes to EU imports from China. As a result, China’s strong position in the global supply chain will continue to provide some support to growth.
- Looking ahead, the target is for higher value-added manufacturing such as the ‘New Three’ industries of electric vehicles, batteries and solar energy products to become the main drivers of growth. Chinese cars have taken the world by storm in just a few years as the rapid expansion of electric vehicles (EVs) drives significant growth in auto sales both domestically and internationally. Despite a recent slowdown in global demand, we expect EVs to remain the bright spot in the auto sector amid the ongoing green transition, and value for price is the key advantage that places Chinese EV makers at the forefront. China's dominance is also strong in the battery sector, commanding nearly 56% of the global EV battery market share. It has made remarkable progress in renewables as well, accounting for more than 80% of the global solar module manufacturing capacity and more than 80% of solar cell exports. But while China seems well-positioned in these emerging industries, its current dominance and future growth could be tested by the chips war, protectionism, geopolitical tensions and the risk of creating other situations of excess capacity, inventories and leverage.
- Nevertheless, China is heading towards lower trend growth. We now expect the Chinese economy to grow by +3.9% on average over 2025-2029. This compares with forecasts at +5% before the Covid-19 pandemic broke out, and +4.5% before the real estate crisis unfolded. In our baseline scenario, we do not see Japanification taking place for the Chinese economy, in part thanks to important differences when it comes to growth of the middle class and the progress in urbanization. But Chinese policymakers urgently need to restore consumer confidence, put in place long-term consumer-focused policies and unleash the high level of precautionary savings.
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Authors
Francoise Huang
Allianz Trade
Allianz Trade
Nikhil Sebastian
Allianz Trade
Allianz Trade