China's Economy: The New Three
China's Economy: The New Three
China is championing what it calls the "new three" industries.
By Sun Yongfu
Despite facing challenges, China's economy continues to exhibit resilience and is actively addressing potential threats to sustainable growth.
To examine the complexities of economic growth and identify new growth avenues in the wake of the pandemic, on February 17, 2024, the 8th Taihe Civilizations Forum (TCF) convened its first sub-session, "LSE China Development Forum & 8th TCF Sub-Session on Economy," at the Sheikh Zayed Theatre, London School of Economics and Political Science (LSE) in London, UK. The following speech is transcribed from the event and has been edited for clarity with the approval of the speaker.
In China, the huge impact of COVID-19 on economic development has been widely discussed. I think the situation in China is not that bad if you compare it to that in some Western countries, though there is a downturn. According to Chinese official statistics , there was a 5.2% increase in China's economy last year. Although comparing it with pre-COVID times, this represents a decrease, if we recall the 40 years of economic growth following the reform and opening-up policy in 1978, where we have seen an average annual increase of about 9.5%. So, while the past year was not that bad, it was still a relative recession in a manner of speaking.
The Chinese economy is facing pressure both internally and externally. Internally, for example, China has a problem with real estate, which historically accounted for about 1/3 of our economic growth. Now, the price of real estate is going down, and how to deal with this is a big question for the Chinese government.
Externally, concerning exports, China faces pressure imposed by the United States, such as the high tariffs imposed by the Trump administration in 2018. Determining where to go in terms of exports for China is another big question.
If we talk about the new engines of Chinese economic growth, we have to find a way to tackle both external and internal problems. Internally, I think the People's Bank of China (PBC) is taking some initial measures, including injecting approximately 350 billion CNY (49.1 billion USD) in loans to policy banks through its pledged supplementary lending (PSL) facility, with a focus on three items: affordable housing, urban village renovation, and the construction of public infrastructure for both normal and emergency use. So, I hope the injection of this 350 billion CNY into the sector will help reverse the downward trend in the real estate market, but this depends on the response from the private sector as well.
Externally, I think China is trying to diversify its exports, not only to developed countries like the United States and European nations, but also to Global South nations. If you look at the data from China's customs, exports to the US from China declined by 17% year on year in the first quarter of 2023, while exports to countries participating in the Belt and Road Initiative (BRI) increased by 25%. China has also been focusing on increasing exports to other emerging markets such as Southeast Asia and Latin America , in addition to the BRI countries. You may know that ASEAN countries have become China's number one trading partner, surpassing the European Union (EU) already. The EU was our number one trading partner for 16 consecutive years until 2019. However, influenced by the United States, I think we witnessed a 7% decrease in bilateral trade between China and the EU last year. So, we must modify our export portfolio accordingly.
Another way is to upgrade the Chinese value chain. Traditionally, China used to export low-end products like toys and some electronics, but presently, China tends to focus on the "new three": autos, especially electric vehicles (EVs), solar cells, and lithium-ion batteries. EVs are particularly notable, with BYD recently overtaking Tesla as the world's best-selling producer of electric vehicles.
The "new three" products not only boost export growth, but are also important drivers of domestic consumption. China aimed to add 160 GW of solar and wind energy capacity in 2023. This is a significant target, exceeding the combined capacity installation of solar and wind in Europe, which was 60.6 GW, and that in the US, which was 13 GW, in 2022. China's overarching goal is to double capacity from 2021 levels and install 1,200 GW of energy from wind and solar sources by 2030. At its current pace, China will be able to achieve this target by 2025, which is five years earlier than expected.
The new energy vehicle (NEV) industry, which includes battery electric vehicles and plug-in hybrids, is booming in China, with both domestic and international companies investing heavily in the sector. China has been paying great attention to the NEV sector since 2012. Favorable government policies, including incentives for both manufacturers and consumers, have spurred the rapid growth of NEV production and adoption.
The NEV industry made remarkable progress in 2023. In the first seven months of the year, the NEV production figures reached 4.53 million, representing a 41.5% year on year growth. China has maintained its position as the world's top NEV producer and seller for eight consecutive years. In the first seven months of 2023, China exported 834,000 EVs, equivalent to more than 15% of China's total EV production in 2022. This represented a 106% increase in export volume compared with the same period in 2022 when only 405,000 EVs were exported.
The People's Bank of China, the central bank of the nation, has been instrumental in driving sustainability through its green financing initiatives to support environmentally friendly projects. By providing financial incentives, favorable lending terms, and regulatory support, the PBC encourages businesses and institutions to invest in green projects that reduce carbon emissions and promote clean technology and retrofitting.
While there are economic challenges and uncertainties in 2024, the focus on green sectors has shown a determination to pivot to more sustainable financing. The transition to renewable energy, NEVs, and supports for a greener economy will be key drivers of high-quality growth . Taking a long-term perspective, the challenges may be seen as a transitional phase from an old property-driven growth model to a new green-led growth. We are always concentrating on the high-tech economy, which is how China tackles all the problems that it is facing internally and externally.