1. The prolonged lack of self-confidence after the end of the rapid growth period
The Chinese economy has been growing steadily since the COVID-19 pandemic subsided at the beginning of 2023. The annual growth of real GDP (gross domestic product) has steadily been five-point-something percent, posting 5.4% in 2023, 5.0% in 2024, and, 5.3% in the first half of this year.
A closer look, however, suggests, that the Chinse economy is not as stable as these figures indicate.
Since mid-2024, local governments have been facing a serious revenue deficit on the back of a sluggish real estate market. The central government issues government bonds to finance subsidies to close the gap for local governments. This is how Beijing is managing to maintain the 5%-plus growth.
Consumption, which accounts for more than half of the total contribution to the growth rate for the first half of this year, has maintained a growth rate of around 5% bolstered by consumption stimulating measures, which feature the trade-in program led by the central government. It does not seem that endogenous consumer confidence is building up.
Product sales, which cover many products eligible for these measures, grew 4.9% year on year for the period from January to July this year. Eatery sales, which are not eligible for the measures, grew only 3.8% for the same period.
The rapid growth period that lasted about four decades from the 1980s came to an end around 2022. Expectations for corporate profits and personal income had to be revised downward significantly.
This made Chinese people lose confidence in economic prospects. Businesses and consumers are now taking more cautious stance on investment and consumption, respectively.
The rapid growth period in which corporate and employee earnings increased year by year lasted for more than 40 years. No Chinese citizen now in active service has not experienced a full-blown depression.
Chinese people largely maintained their confidence until 2021. When the pandemic was rampant worldwide, China was the only country that successfully implemented a rigorous isolation policy.
Their confidence in the future of the economy started to crumble in 2022, when the zero-COVID policy that stringently isolated COVID-19-positive patients proved to be ineffective.
More than two and a half years have passed since the beginning of 2023, when the pandemic subsided. However, it will likely take more time for corporate executives and consumers to recover their confidence in China’s economic prospects.
2. Technological innovation shows new vigor under a slowed economy
It is clear that the high growth power of the Chinese economy as a whole has dwindled.
If you visit China, however, you will notice a new vigor that can underpin the future of the economy in not a few industrial sectors.
The large language model (LLM) developed by Chinese generative AI developer DeepSeek was released at the end of 2024. The fact that this LLM was on a par with ChatGPT, a cutting-edge LLM developed by OpenAI of the US, attracted worldwide attention.
In another development, new-energy vehicles (NEVs), such as electric vehicles (EVs) and plug-in hybrid vehicles (PHVs), are rapidly expanding their share in the Chinese domestic automobile market. NEVs are creating new needs on the assumption that they fundamentally transform the concept of automobiles as a means of transportation, redefining them as part of our living space.
Accordingly, automated driving technologies that lessen the burden of driving a car constitute an integral part of technological innovation needed for automobiles developed with such a new concept.
Last November, China relaxed regulations on issuing a short-term visa. Owing to this, the number of Japanese company officials visiting China is now increasing rapidly.
A growing number of such business travelers have experienced riding in a self-driving car in China.
In July in Wuhan, I also experienced this for the first time when I took a driverless taxi that ran on public roads.
As the practice is still at a demonstration stage, the geographical areas where driverless taxis are available are limited. Because these taxis prioritize safety, they run at a legally permitted speed, slower than ordinary taxis and cars.
Even so, I was deeply impressed with this driverless ride; the taxi ran on public roads where many passenger cars and trucks were running, stopped at traffic lights, turned at intersections, and changed lanes while the steering wheel and the direction indicator at the unoccupied driver’s seat automatically moved.
The Chinese e-commerce market is also quite ahead of the Japanese counterpart.
It is now a norm in urban areas of Chinese cities that groceries and foods you order from a supermarket and an eatery, respectively, are delivered to your home in 30 to 60 minutes.
The payments involved are all made by smartphone. In fact, payments for eating out at restaurants and using all kinds of means of transportation, ranging from airplanes to underground railways, as well as account settlements between individuals, are all made via smartphone. Chinese people typically do not see cash in their daily lives.
However, foreign travelers who do not have a bank account in China have limited access to such smartphone payment services, which require a link to such accounts.
For this reason, I have to pay by cash at a restaurant in China. Seeing such a scene, Japanese people living in China often tell me that the last time they saw cash was when they last met me.
These payment services are convenient for Chinese citizens and foreign nationals living in China. However, since credit card payments are often not available, these types of services are often inconvenient for business visitors to China.
In addition, driverless self-driving taxis are also difficult to use unless you are with a person familiar with local conditions. Thus I often feel that there is room for technological improvement.
Still, I keenly feel how fast technological innovation is accelerating in China. In Japan, however, people have little chance to experience such fast-growing technologies.
3. A patchy economy
The Chinese economy is patchy. On one hand, it cannot maintain a certain level of growth without policy support from the government as described above. On the other hand, it has vibrant industrial sectors brimming with self-motivated technological innovation.
An analysis of the regional structure shows that in major coastal cities such as Beijing and Shanghai, declining real estate prices are dragging down asset value, which in turn is dampening consumers’ willingness to purchase real estate.
Third- and fourth-tier regional cities with weak industrial foundations are not faring well either. They can no longer afford to expand the construction of infrastructure, a key industrial foundation, due to serious fiscal difficulty on the back of a stagnant real estate market. These local economies are inevitably declining.
Wuhan, Chengdu, and Hefei in inland China are seeing the development of high-tech industrial clusters revolving around local prestigious universities. These cities are also accepting production and development bases of blue-chip companies as well as talent from coastal China. These local economies are thriving.
(For details, see my article previously posted, “What China's 5.2% growth really means and why talent are leaving coastal China (tentative translation).”)
As a result, consumption is sluggish in major coastal cities and third- and fourth-tier cities with weak industrial foundations but continues to increase rather fast in major inland cities. In sum, regional development is patchy in China.
Characteristically, the Chinese economy looks quite different depending on what region and aspect is looked at.
4. Policy management conducive to long-term stability of the Chinese economy
Under such circumstances, the Chinese government is focusing on shoring up the economy with consumption stimulating measures to achieve the target of 5% growth.
At the moment, there seems to be no side effects such as an asset bubble. However, if the government tries to maintain 5% growth target for long, there may be a risk.
During the era of the Hu Jintao administration, which lasted until 2011, China always set ambitious growth targets and carried out economic stimulus measures to achieve them. This invited inflation and sent real estate prices soaring.
Under the Xi administration, which was launched in 2012, China reduced its growth target in stages in line with its real growth potential. This made a relatively stable economy possible without generating inflation or a serious asset bubble.
For a period of three decades until 2010, real GDP grew 10% on average. In 2019, China reduced the growth target to the 6% mark. More than five and a half years on, the growth target is maintained at 5%.
Why does Beijing set such a relatively high target? Observers point out that Beijing once floated a target of doubling national income by 2035 from the 2020 level against the backdrop of the 14th Five-Year Plan, which was announced in the autumn of 2020.
To achieve this target, China needs to maintain 4.7% growth on average for 15 years.
Future prospects of the Chinese economy indicate that the growth rate will inevitably slow down due to such structural factors as an increasingly aging population with fewer and fewer children, less investment in large infrastructure constructions, and slower urbanization.
In anticipation of such a slowdown, Beijing wants to maintain 5% growth until 2025, according to observers.
As of 2020, when the long-term target to be achieved by 2035 was set, the Chinese government did not project that the period of rapid growth would come to an end around 2022. Accordingly, the government must have thought that the long-term target was not as challenging as it is believed today.
After that, however, the situation surrounding the Chinese economy changed tremendously.
Downside risk factors include an increasingly sluggish real estate market, local fiscal difficulties, the end of the rapid growth period, the lack of self-confidence in economic prospects, and the Trump Shock. And the list goes on.
The Chinese economy successfully maintained stability for a period of 10 years from 2012, when the Xi administration was launched. This was largely because China set a growth target that reflects its real growth potential.
If China is to prioritize the long-term stability of the economy, it should stick to that basic policy.
5. Coming up with a growth target from the perspective of accommodating the middle class
For a developing country, prioritizing economic growth until its income level becomes on a par with that of developed countries may help improve the well-being of the people. This is because the economic development level of a developing country is directly linked to the level of its economic and social infrastructure.
However, once the income level of the people reaches the level of developed countries and the public at large come to enjoy a certain level of cultured living standards, the well-being of the people may not increase in proportion to their nominal income level.
Widening income disparities among the people increase the discontent of the middle and lower income earners, even if the average income level rises. A typical example is happening in the US and the UK.
The middle class in these countries is deeply dissatisfied with the political, business, and academic elites who are well aware of widening income disparities but fail to implement appropriate measures to rectify the situation.
Such dissatisfaction led to the establishment of the Trump administration and Brexit.
These developments are interpreted as the result of the middle and lower income earners harboring strong distrust of the elite, known as the Establishment, and making an option the elite dislikes.
It is hard to believe that the people of a nation with such serious social division are happy.
Last year, per capita GDP of the US and the UK was 2.6 times and more than 1.6 higher than Japan’s per capita GDP, respectively.
However, Japan is not experiencing a social divide as seen in the US and the UK. The Japan pubic generally seems to be more at ease.
China’s per capita income level is still about 40% of Japan’s. That said, I feel the living standards in many cities in China are nearing those in developed countries.
The fact remains, however, that regional disparities are wider than in Japan and that some regions remain poor.
For the benefit of socioeconomic stability of China, there seems to be a need for a policy that focuses on raising the income level of poor people and regions without sticking to the income-doubling target.
To that end, it is important to facilitate proactive economic development by leveraging the vitality of private enterprises while improving and expanding safety nets for the economically vulnerable, such as unemployment insurance, old-age pensions, and health insurance.
Also of importance is to improve the state of school education so as to make society more respectful of diverse values. The idea is to placate the excessively competitive mindset known as “内巻” (nèijuǎn), which is at the root of excessive competition among Chinese companies.
China should focus on policy management that put the public first and accommodate the hearts of the middle and lower income earners to create a high quality society from the perspective of the people in the middle class.
Dedication to these ends should enhance public confidence in the government, even if the target of doubling income by 2035 is not achieved.