China's path to finding new growth drivers

To achieve its growth target, China wants to stabilize real estate and infrastructure, while investing in manufacturing and technology.

Since 2000, China's average GDP growth rate has been over 8% per year, ushering in a period of dramatically improved living standards and virtually eliminated extreme poverty. Thanks to market opening and trade reform, China has become the world's second largest economy in terms of size in US dollars and the world's largest in terms of purchasing power parity (PPP).

However, China's impressive growth has come with an imbalance in the economy. People spend little and save mostly. These resources have flowed into real estate and infrastructure, the two traditional growth engines. Over time, the benefits from these pillars have diminished, even facing difficulties.

The construction of roads, bridges and high-speed rail has caused local governments to increasingly borrow money. The real estate sector, which once accounted for more than 20% of China's economic activity, has entered its third year of crisis.

According to the International Monetary Fund (IMF), the number of new construction projects has decreased by 60% compared to before the pandemic. In 2023, existing home prices fell by 6.3% compared to the same period in 2022 in major cities.

An outdoor food stall in Beijing, China on January 12. Photo: Reuters — An outdoor food stall in Beijing, China on January 12. Photo: *Reuters*

Despite the slowdown in these two traditional engines, China is still targeting growth of around 5% this year, the same as in 2023. To achieve it, officials plan to do their best to stabilize them. At the annual meeting of parliament earlier this month, Premier Li Qiang promised to transform the country’s growth model and reduce risks in the property sector and local government debt.

Accordingly, Beijing wants to rationalize spending on infrastructure. There will be no new subway line in Harbin. In Kunming, the third phase of the subway system has not been approved by the central government. In Baotou (Inner Mongolia), subway construction is also on hold.

In real estate, Beijing has asked local governments to create a “white list” of real estate projects that state-owned banks can continue to finance. The government is also focusing more on the affordable housing segment subsidized by the state.

In parallel, Beijing is now focusing on “new productive forces.” Wang Huiyao, founder of the Center for China and Globalization, a Beijing-based think tank, said the term reflects the government’s belief that the digital economy, high technology and energy transition can drive growth.

Xiang Songzuo, director of the Greater Bay Area Financial Research Institute and former chief economist at the Agricultural Bank of China, said the government wants a smooth, controlled growth process to avoid serious problems that could arise such as high unemployment and social unrest.

“They know the old engines can no longer guarantee the economic future, so they are pushing investment into these new areas,” he said.

To finance its “new productive forces” stimulus policy, the government plans to issue 1 trillion yuan (nearly $138.3 billion) of long-term bonds this year. “There is a consensus that China’s economy needs to continue to develop, with its structure and growth model shifting to the high-end segment,” Xiang Songzuo added.

Previously, thanks to policy support, the streets of Beijing and Shanghai were filled with domestic electric vehicles from BYD, Nio, Li Auto and XPeng. Not only that, their solar panel manufacturing industry also had to make the West wary. The country continues to affirm its name in areas such as energy transition, artificial intelligence, digital economy and biotechnology.

But there are still challenges in boosting the strength of new growth engines. Overcapacity in some industries could create trade disputes with other major economies, according to Le Monde.

Boosting production also requires domestic consumers to open their wallets more. However, after the property market cooled, consumer confidence also declined, as about 70% of the country’s household assets are in housing. Statistics show that while production accelerated in January and February, at 7% compared to the same period in 2023, retail sales increased by only 5.5%.

Louise Loo, China economist at Oxford Economics, said economic activity in the country had largely stabilized at the start of the year. But some of the strength may be temporary. The job market continued to deteriorate. The national unemployment rate rose to 5.3% in February from 5.2% in January.

"Consumers are temporarily excited by spending related to the Tet holiday. But without additional large consumption stimulus this year, it will be difficult to maintain a strong spending pace," the expert said.

So far, Chinese policymakers have continued to pledge further measures to help stabilize growth, after steps taken since June had only modest effects. But analysts warn that Beijing’s financial capacity is limited and said Li’s speech at this month’s National People’s Congress meeting failed to inspire confidence among investors.

Foreign direct investment in China in the first two months of the year fell 19.9% to 215.1 billion yuan ($29.88 billion), continuing a downward trend that began after growth slowed due to a prolonged property downturn and weak domestic demand, China's Ministry of Commerce said this week.

Some economists say China risks falling into a Japan-like slump by the end of the decade unless the government reorients the economy toward household consumption and market-based resource allocation.

Zichun Huang, China economist at Capital Economics, expects economic momentum to improve further in the near term thanks to the tailwind from policy stimulus. "But this recovery may be short-lived given the economy's underlying structural challenges," he said.

Phien An ( according to Le Monde, Reuters, WSJ )

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