China's search for 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 GDP growth has averaged over 8% per year, ushering in a period of dramatically improved living standards and virtually eliminated extreme poverty. Thanks to market opening and trade reforms, 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 been accompanied by economic imbalances. People spend little and save mostly. These resources have flowed into real estate and infrastructure, the two traditional growth drivers. Over time, the benefits from these pillars have diminished, even facing difficulties.

Construction of roads, bridges and high-speed rail has caused local governments to increasingly borrow. 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 incentives. There will be no new subway line in Harbin. In Kunming, phase 3 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 drivers 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) in 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 want 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. However, after the property market cooled, consumer confidence also declined, as about 70% of the country’s household assets are in real estate. 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 the country's early-year economic performance had been largely stable. However, some of the strong factors 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 season. But without additional large consumption stimulus this year, it will be difficult to maintain a strong spending pace," experts 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 Qiang’s speech at this month’s National People’s Congress meeting failed to inspire confidence among investors.

Foreign direct investment into China in the first two months of the year fell 19.9% year-on-year 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 weekend.

Some economists say China risks falling into a Japan-like slump later this 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 due to the economy's underlying structural challenges," he said.

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

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