(Bloomberg) — China’s bifurcated economy can one moment produce gloomy headlines about its domestic woes and the next raise global fears about Chinese manufacturing dominance.
Most read articles on Bloomberg
Mixed signals on Monday showed China’s slowest quarterly growth in five quarters as robust industrial production was offset by weak consumption amid a continuing real estate slump. But a ray of hope is beginning to emerge from the fog: President Xi Jinping’s long-held pursuit of technology-driven “quality growth” is actually starting to pay off.
While Japan and the United States have suffered severe economic damage from plummeting housing markets, China’s technological advances and resulting export boom have helped keep economic growth within its target range of around 5 percent.
And the country’s leaders are determined to keep it that way: President Xi Jinping and top Communist party officials gather in Beijing this week for the Third Plenary Session, a once-every-five-years meeting to draw up long-term economic plans.
But they face big hurdles: Chinese consumers still don’t believe the hype, and confidence in the economy remains well below pre-pandemic levels, as sluggish June retail sales show.
Moreover, the flood of cheap electric cars and solar panels onto global markets – a key reason the economy has performed so well – is provoking a protectionist reaction from U.S. and European governments worried that China’s industrial might will lead to a new wave of unemployment.
Things could get even tougher if Donald Trump is re-elected in November, a move that political analysts say is now more likely following the assassination attempt over the weekend and his bloody, fist-raised exit from the stage in Butler, Pennsylvania, where he has threatened to impose 60% tariffs on Chinese goods.
For Xi, such protectionist attacks only strengthen his determination to become self-sufficient in strategic areas such as advanced computer chips and ensure that China is not hamstrung if trade or military tensions worsen.
If Beijing can keep fending off U.S.-led containment efforts, the tech sector is projected to account for 19% of China’s gross domestic product by 2026, up from 11% in 2018, according to an exclusive analysis by Bloomberg Economics. Combined, what Beijing calls the “New Three” — electric vehicles, batteries and solar panels — could swell to 23% of GDP by 2026, more than enough to make up for a struggling real estate sector that is expected to shrink to 16% from 24%.
“Pessimism about China’s prospects is understandable, but it is also overdone,” said economists Zhang Xu and Eric Chu at Bloomberg Economics. “The government may now be on the cusp of achieving a major rebalancing.”
Xuzhou, a city of 9 million people about halfway between Beijing and Shanghai, is grappling with a transition driven by the policies of President Xi Jinping.
Until about a decade ago, Xuzhou’s economy was driven by heavy industries such as coal, steel and cement. Real estate also played a key role: In 2015, like many other Chinese cities, Xuzhou began demolishing slum homes and building new apartments, sparking a five-year surge in property investment, prices and spending on furniture and other goods.
Authorities, concerned about the sudden rise in debt levels, then put the brakes on. Xuzhou, like other so-called second-tier cities, has been hit hard, with some areas seeing home prices fall by more than half since 2021. With its natural resources depleted, the city has also closed coal mines and steel factories, turning instead to three sectors: new energy, machinery manufacturing and new materials.
That’s where GCL Technology, the world’s second-largest maker of polysilicon, the key material in solar panels, comes in. The company’s innovations have made it the world’s only commercial manufacturer of granular silicon, a pebble-like, gray mineral that requires about 80% less electricity to produce than the larger chunks used in a more established technology known as the Siemens process, developed by a German company.
This has enabled the company to reduce carbon emissions, lower costs, increase production and expand market share. Over the past five years, the company says it has created more than 5,000 jobs in Xuzhou and nurtured more than 450 suppliers, becoming an important driving force behind the local green industry.
“We have gone from being a follower to a leader in the industry,” said Xu Zhenyu, assistant vice president of GCL’s polysilicon business unit. “Technological innovation has been crucial in this process.”
This is the kind of change that President Xi Jinping called for in October 2017, when he unveiled plans to transition from fast growth to “quality growth” at the twice-decade Communist Party Congress.
“Since the 1960s, of more than 100 middle-income countries, only 12 have succeeded in becoming high-income countries,” Xi said at a major economic conference in December 2017. “All successful countries experienced a transition from quantity to quality in terms of economic growth after a period of rapid expansion. Those that stagnated or regressed failed to achieve that fundamental transition.”
Amid boom-and-bust cycles in the property market, on-and-off coronavirus lockdowns and a surge in manufacturing as the world reopens, Xi’s drive has endured, coining new catchphrases such as pursuing the development of “new productive forces”.
GDP related to high-tech industries, including health care, advanced equipment, information technology and communications equipment and services, and research and development, is expected to expand an average of 12% between 2018 and 2023, well above nominal GDP growth of 7%. The Bloomberg Economics forecast is based on the assumption that these industries can roughly maintain their current growth pace.
Ahead of the meeting, Liu Lei, a researcher at the National Institute of Financial Development, a state-run think tank that advises government agencies, said the focus on technological progress will be a priority for at least the next decade.
“China is now moving from imitating other countries to surpassing them, and it needs government support to do so,” he said. “Support needs to continue until a relatively mature market environment is in place and China has assumed a leading position in key industries.”
The flip side of the focus on technology is that other industries associated with older drivers are being deprioritized, including real estate.
In Xuzhou, the economic transition has been difficult for people not working in emerging industries. Gao, a 43-year-old woman who declined to give her name, said sales at her furniture store selling children’s beds have fallen by half this year.
“Sales have dropped sharply since the Chinese New Year,” she said, folding sheets on a display shelf. “It feels like everyone is suffering, including other industries. I’ve never been more worried.”
Across China, weakness in the property market is hurting consumer sentiment, youth unemployment is worryingly high and fierce price wars in sectors like autos are squeezing corporate profits. But the government and central bank have refrained from pivoting to stimulus measures as overall growth is buoyed by surging exports.
Economists say there is room for further stimulus if the 5% growth target proves unreachable, but China’s leaders remain committed to supply-side policies rather than demand-side “welfarism,” which President Xi has previously criticized as a trap that leads to “lazy people.”
That means a rebalancing to a consumption-driven economy, as recommended by agencies like the World Bank and the International Monetary Fund, has been put on hold for now. Government advisers believe that increasing the supply of luxury goods will encourage consumers to own them, while higher wages paid to make them will give workers the means to buy them.
In Xuzhou, GCL, excavator makers Xuzhou Construction Machinery Group and Caterpillar Ltd. are among the companies offering high-paying jobs, and more quality ones are on the way: BYD, the world’s top electric-vehicle maker, is investing in two factories in the city.
David Li Daokui, one of China’s most prominent economists and a government adviser, worries that the push for technology will put more money in the hands of corporations and less in consumers’ wallets, which could exacerbate the income inequality seen in many developed countries. He is working on a proposal for the government to restrict the use of AI in certain occupations to prevent the possibility of mass unemployment.
“Technology is literally replacing humans in fields like news, accounting, law and advertising,” Lee says. “Therein lies the tension and the dilemma.”
President Xi Jinping’s emphasis on high-tech manufacturing is clear, but it is not the only aspect of his ambitions to remake China. A diagram explaining “quality growth” from China’s top economic planning agency shows some 29 interlinked text bubbles full of jargon.
So while Chinese companies are being encouraged to embrace President Xi Jinping’s vision for a high-tech future, the government’s ill-planned efforts to promote income equality have turned into a harsh crackdown on industries like private tutoring, costing thousands of jobs and making entrepreneurs wary.
The broadness and vagueness of the concept of “quality growth” has led to a race among local governments to determine how precisely to measure it and whether it meets all the right criteria. Some have identified nearly 50 indicators, ranging from energy consumption per unit of GDP to the number of public toilets per 10,000 people.
Indeed, “quality growth” has become a central guiding principle in nearly all aspects of economic activity, at both local and central government levels. During press conferences and high-profile events, ministers rush to explain what they are doing to achieve it. The central bank has joined in, deploying a series of targeted policy tools to pump money into areas like green energy and technology. The Ministry of Finance has followed suit, spending even more on research and development.
A Bloomberg analysis of Xi’s public speeches found that Xi himself has uttered the phrase “quality growth” at least 128 times in 2023, nearly double the number in 2022. As of Monday, Xi had said it 66 times this year.
For China’s leaders, this isn’t just about economics: Beijing fears that China’s continued reliance on the United States and its allies for critical technologies could lead to a conflict with the United States.
Chinese leaders have set an ambitious goal of becoming a “middle-income country” by 2035. To achieve this, they need to raise per capita GDP from the current $12,600 to more than $20,000 and sustain annual growth of about 5 percent. Policy advisers point to countries such as South Korea, which have managed to move up the value chain and avoid the middle-income trap.
For China to replicate South Korea’s success, it needs to boost productivity through innovation, which leads to higher economic output with the same or even lower inputs like labor and capital. This is important because China has an aging society, its labor force has been shrinking for a decade, and the returns on credit-driven investments like bridges and roads are declining.
China’s total factor productivity — a measure of how efficiently resources are used to produce output — has stagnated at about 40 percent of U.S. levels since 2008, according to longtime state counselor Wang Yiming. South Korea and Japan reached 60 percent and 80 percent of U.S. productivity, respectively, before their economic growth relative to the U.S. began to stagnate. It will be an “uphill battle” for China to drive rapid productivity growth, Wang said.
Larry Hu, head of China economics at Macquarie Group, also compares Xi’s approach to South Korea’s shift from heavy industry to high-tech industries after the Asian financial crisis in the late 1990s, though this time China faces a much tougher environment.
“The key to whether China can achieve its technological goals will be the pace of change in technology itself. The faster advances in AI and advanced semiconductor manufacturing occur, the harder it will be for China to catch up,” he said.
–With assistance from Davey Chew and Gabriel Coppola.
Most read articles on Bloomberg Businessweek
©2024 Bloomberg LP
