China’s new top leadership team, unveiled in October at the 20th Congress of the Chinese Communist Party, has confirmed the political direction for the country in the years ahead, but the economic outlook is still to be fully clarified.
The country’s economy has been impacted negatively by a number of major trends in the past few years. Internationally, there has been the decoupling of China and the U.S., particularly in terms of technology and finance, exacerbated by the ongoing trade war. Domestically, there has been a real estate crisis, an ever-greater government debt overhang and problems in big tech and other industries resulting from a raft of policy tightening. China’s demographic problem — an aging population and shrinking labor force—underlies longer-term concerns for the country’s economy, with some now predicting that China may never become the world’s largest economy as once expected.
These challenges, among many others, have led to a situation where, in our view, the biggest challenge is regaining the confidence of the private sector and foreign investment in China. While there are clearly still opportunities in the China market, many private sector business people are considering shifting their focus in terms of future investment to other countries.
Despite these issues, and the effects of China’s erstwhile “zero-Covid” policy, those businesses that understand and can harness the new drivers of the country’s economy will be well rewarded. To make it easier to understand these driving forces, I will summarize them in the acronym GRID: green, real, inclusive and digitalized.
“Green” represents China’s accelerated energy transition to renewable sources and the reduction of carbon emissions by both consumers and companies. “Real” refers to a focus on the real economy for goods and services, at the heart of which is the trend towards manufacturing of higher-value high-tech products. “Inclusive” refers to the expansion of the proportion of the Chinese population who are active middle income consumers. “Digitalized” looks at the overarching digitalization of all the above elements, as well as the growth of the digital economy as a whole.
Green
China’s green transition has been particularly evident in recent years. The simplest example is the incredible decrease in air pollution levels in many major cities. Recent reports show that China achieved in seven years the same levels of pollution reduction that it took the U.S. three decades to get to.
The transition was accelerated two years ago, when President Xi Jinping announced that “China will strive to peak carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060.” The new energy sector in the country has been booming, thanks to these aggressive goals.
Companies, mostly private rather than government-run, across a wide range of sectors have created an almost complete supply chain for green technologies. Examples include Contemporary Amperex Technology Co. Ltd., which is the world’s largest lithium-ion battery-maker and LONGi Green Energy Technology Co. Ltd., which is a world-leading solar technology company. There are also a number of new-energy vehicle (NEV) manufacturers such as Nio Inc. and BYD Co. Ltd., that are looking to compete on the world stage.
China is already the world’s largest producer of wind and solar energy, and the cost of solar is now so low that the government has stopped offering subsidies in the area. As a result, we will see rapid and widespread adoption of solar installations across China, and hopefully around the world. According to the International Energy Agency, 36% of the world’s solar energy growth and 40% of wind energy growth over the next five years will come from China.
China’s relatively well-developed green technology and manufacturing capacity also help the country become energy self-sufficient. There is also the opportunity for the world’s second-largest polluter behind China, the U.S., to utilize these Chinese products and technologies, although some Chinese companies have found it increasingly difficult to export their products to the U.S.
Real
It is no secret that China is determined to improve its position in the global supply chain by upgrading its industry base from low-cost and high-pollution assembly lines, to become an advanced technology- and innovation-driven manufacturing center.
Clearly, due to geopolitical, economic or security factors, import replacement for core technologies such as semiconductors will continue to be one of the key drivers for China’s manufacturing sector.
Chinese leaders have been repeatedly emphasizing the importance of the real economy over a financial product-dominated economy characterized by Wall Street banks. The share of the manufacturing industry in U.S. GDP has now dropped to 12%, down from 28.1% in 1953. However, more strategic manufacturing capacity is now appearing in the U.S.
The recent explosion of digital and virtual services has changed China, but “Real” in the GRID acronym refers to the next challenge, which is producing high-quality hardware and core technologies, mirroring the successes of Germany.
Inclusive
The “I” in GRID stands for “inclusive,” referring to the common prosperity policy rolled out in 2021, aimed at spreading prosperity to hundreds of millions of people rather than concentrating wealth in the hands of a smaller upper and middle class. As Xi reminded the 96.7 million CCP members when he became leader in 2012, this more inclusive redistribution of wealth was the original aspiration of the Chinese Communist Party when it was founded in 1921. The increased purchasing power created by such a shift would in time make up the majority of consumption driving the country’s economy.
China’s market consumption can be split into two key demographics, high-net worth individuals and ordinary people, with the larger part of the expected increase in growth coming from the latter. Current upgrades of the welfare system are also designed to facilitate higher consumption by low-income families by more effectively meeting their basic needs.
Digitalized
Digitalization within the GRID acronym is the key transitional element that over-arches the global shift to the next stage of growth. While China is already one of the most digitally enabled societies in the world, the holistic digitalization of its manufacturing sector is key to the country moving up the value chain and promoting the “real” economy. Rather than simply focusing on digitalization in the last mile of e-commerce as most internet companies in China have been doing, digitalization in fact needs to permeate all stages of a company’s processes.
IDC estimates suggest that the value of China’s digital economy will reach over $9 trillion, or nearly 55% of the country’s GDP, in 2023.
By shifting in the direction of the GRID approach, China will be in better shape to remain competitive in a world economy becoming ever more dependent on innovation.
What the future holds
There will continue to be abundant opportunities for private companies, including those that are foreign owned, alongside the robust state-owned enterprise (SOE) sector, as long as their strategies are aligned with the new national priorities summarized in GRID.
The GRID strategy for keeping China’s economic growth on track would be unique. Using consumption growth as well as holistic, high-value manufacturing as the key drivers offers a multitude of opportunities for China to maintain its global position, despite current geopolitical issues.
But it will not be without its challenges. Convincing Chinese consumers to spend in times of economic uncertainty may be problematic, and the full digital transformation of manufacturing and associated business processes will not be easy. Learning to combine the two effectively requires innovative approaches and the joint efforts of private enterprise and governmental organizations, with the aim of moving China at least in step with, and probably ahead of, the rest of the world.
Zhou Li is the assistant dean of the Cheung Kong Graduate School of Business and editor-in-chief of CKGSB Knowledge.
This commentary has been edited for length and clarity.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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