China is shouldering the mission of achieving economic transformation through encouraging “new productive forces.” This was reiterated at the recently concluded Third Plenum of the 20th Central Committee of the Communist Party of China, a once-every-five-years central decision-making meeting.
For anyone following the Chinese economy, this statement has been emphasized multiple times last year, as Chinese leader Xi Jinping is attempting to steer the Chinese economy away from traditional growth drivers that are experiencing various forms of decline.
The Chinese government aims to diversify the Chinese economy, shifting away from export-driven industries, debt-driven investments, and real estate development that have been propelling China’s economy for decades, towards innovation, technology, scientific research, and domestic consumption.
Currently, the credibility of the national economy and the Communist regime depends on whether the Chinese government can achieve this goal. There are two key questions: first, whether this approach will be effective; and second, whether it can offset the decline in other industries to support the economy.
The first question remains unanswered and will take years to reach a conclusion. Chinese officials reiterated their arguments during this plenum.
Disappointingly, the official communiqué after the plenum did not provide any specifics. Chinese officials reiterated hollow national goals, acknowledging the challenges in implementing these economic policies in the future.
“This is a rebranding of the new development framework emphasized since the 19th National Congress of the Communist Party of China in 2017… It did not shift policy focus to economic growth nor to security or self-reliance,” a recent briefing from New York-based financial giant JPMorgan to clients summarized the recent Chinese economic policy meeting.
Clearly, it is no easy task to comprehensively transform the Chinese economy through policy reforms that combine planning with market forces.
Recently, Tang Fangyu, Deputy Director of the Central policy Research Office of the Communist Party of China in Beijing, told reporters, “Advancing Chinese-style modernization faces many complex contradictions and problems, and we must overcome multiple difficulties and resistances.”
As we observe in real-time the process of China’s economic transformation, the second question appears more acute. With consumers and businesses at an all-time low in sentiment, traditional growth engines like infrastructure investment and real estate are in a slump, putting immense pressure on the Communist regime to showcase results or at least make progress.
Given that technological innovation takes at least several years, the Chinese government has been pinning hopes on the domestic consumption economy to fill the gap in the short term. This is the most critical factor determining the trajectory of China’s economic development.
However, so far, household consumption has been disappointing, with official statistics showing only a 3.7% increase in retail sales in the first half of 2024, while per capita disposable income rose by 5.4% during the same period. In other words, Chinese consumers have been saving instead of spending.
Official data from the People’s Bank of China showed that in the first half of 2024, Chinese households added 9.27 trillion yuan (about 1.3 trillion US dollars) in new deposits, a 22% decrease from the first half of 2023. Yet, retail sales did not increase. In fact, retail sales in June only grew by 2% year-on-year, the lowest increase in a year and a half.
The Chinese government officials have yet to convince consumers to spend. Household consumption accounts for only 39% of the national economy, whereas the average level for member countries of the Organization for Economic Cooperation and Development (OECD) based in Paris is around 54%.
Moreover, the actual data may be bleaker than official statistics suggest. In a report released on July 18 by the New York-based economic research firm Rhodium Group, it was noted, “Other data sets show that household spending fell in 2022, with only a slight recovery in 2023 and early 2024.”
Structural issues obstructing consumption run deep. One key factor is the relatively low level of household incomes and extreme income inequality. Rhodium Group believes: “Given the lower savings levels of low-income households, reducing the savings rate alone is unlikely to significantly promote overall consumption.”
Even high-income earners are tightening their wallets and cutting expenditures. Retailers of the most prominent luxury goods in China may have sounded the alarm. The Swiss-based largest watchmaker, Swatch Group, noted in its quarterly financial report released last week that there was a “sharp decline” in demand for luxury goods in the Chinese market. Several luxury retail companies, including British luxury giant Burberry, Swiss luxury group Richemont, and German luxury company Hugo Boss, reported significant declines in sales in the Greater China region.
In 2024, manufacturing and exports have been temporary drivers of China’s economic growth, while the Communist Party has been striving to move away from the excessive influence of this single engine. With robust foreign demand and support from Communist subsidies, the manufacturing sector offset negative factors such as lagging investment, real estate growth, and consumption.
However, this prosperity could be short-lived. Both the Republican and Democratic parties in the United States support increasing tariff restrictions on Chinese goods. In the 2024 presidential election, Republican candidate and former President Donald Trump recently proposed that upon his return to the White House, a uniform 60% tariff would be imposed on all products manufactured by the Communist Party of China.
While the Communist Party of China warns that significantly raising tariffs would be a double-edged sword, damaging the U.S. economy, the actual consequences are still pending. In fact, the tariffs imposed by the Trump administration in 2018 did not significantly increase U.S. inflation or bring substantial negative impacts.
The government led by current President Joe Biden retained some of the tariff impositions on China by former President Trump and even increased tariffs on certain industries like electric vehicles. This indicates that hawkish pressure on China may still persist, with Washington facing minimal resistance in raising tariffs on China.
Goldman Sachs, based in New York, recently estimated that a 60% tariff would reduce China’s GDP by 2 percentage points. UBS, based in Zurich, Switzerland, calculated a 2.5% reduction, about half of China’s expected GDP growth.
In summary, the work of rebalancing and readjusting the Chinese economy will become more challenging.
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This article was translated and paraphrased for Global News.