As China looks to expand its economy following the pandemic, returning to the previous model will not work. Changing demographics and consumer habits require new ways to boost growth.
China’s economic rebound from the pandemic at first glance looks more like a giant leap. The National Bureau of Statistics (NBS) reported a 18.3% increase in gross domestic product (GDP) year-on-year for the first quarter of 2021. But beneath these numbers, the story is more nuanced.
This year’s jump is compared to the massive decline in output seen during the first days of 2020, as the Covid-19 pandemic emerged and China’s industry ground to a halt. Looking at the results on a quarterly basis showed the year-on-year growth for the fourth quarter of 2020 was 6.5% and 2.3% for the year as a whole.
Alicia García-Herrero, chief economist for Asia-Pacific at Natixis, says: “A more relevant question is what growth would really be once we exclude the base effect from last year. One way to address the issue is to look at the growth rate from a quarter-on-quarter perspective. After seasonal adjustments, China’s quarter-on-quarter growth rate was 0.6% in the first quarter of 2021 versus the fourth quarter of 2020. This is lower than the average seasonally adjusted quarter-on-quarter growth rates of 1.9% for the pre-pandemic period of 2017-19.”
A full normalisation of the economy depends on the pace of vaccination, which is still low in China given the large population
Ms García-Herrero adds that business does not appear worried about the uncertainty, as the Purchasing Managers’ Index data for both manufacturing and non-manufacturing has remained above 50, indicating little change in sentiment within the industrial sector.
To get growth traction, China may need to reassess its market structure. Chan Kung, founder of China-based think tank Anbound, says: “I do believe that China can obtain a stable economic growth rate. This is determined by the size of China’s market: a huge market is likely to form a stable economic growth rate. Both China’s domestic and external markets will form a hedging relationship, leading to relatively stable economic growth. Such an outcome is possible, at least in theory.”
Domestic consumption
Creating such a sizeable and stable economy is down to the progress of a number of market forces. Sheng Songcheng, previously director-general of the department of statistics and research at the People’s Bank of China and currently a member of the expert advisory committee of Anbound, says there are several factors that will play a role. “If you look into the source of the recovery, final consumption expenditure, total capital formation and net export contributed 63.4%, 24.5% and 12.2% to GDP growth, respectively, in the first quarter of 2021. In comparison, final consumption expenditure actually drew back the economic growth for the year 2020, a -22.0% contribution to GDP growth, while investment was the greatest driver, contributing 94.1% of the growth and net exports contributed 28%.”
Jinny Yan, chief China economist at ICBC Standard Bank, agrees that consumption, investment and net exports are the key growth drivers. “Consumption has again in the first quarter of 2021 become the key driver, accounting for more than 60% of GDP growth. We can see this as strong evidence that China is moving towards a consumption-led growth model.”
Alicia Garcia-Herrero
It is likely this trend will continue. “I’m inclined to think that consumption is a key factor for China’s economic growth this year,” Mr Sheng says. “The tertiary industry witnessed a 4.7% compound growth rate, which is still far below its usual level. In April 2021, the total retail sales of social consumer goods increased by 17.7% year-on-year, with an average growth of 4.3% in two years, 2 percentage points lower than that in March.
“In the first quarter of 2021, the average annual growth rate of per capita disposable income was 7%, and the average annual growth rate of China’s per capita consumption expenditure was 3.9%. The gap between disposable income growth and per capita consumption is also greater than previous years.”
Domestic consumption in China could climb still higher, creating a further boon to the economy as the country comes in line with developed economies. “Consumption is something China can exploit further for its potential for economic growth,” says Alex He, research fellow at the Centre for International Governance Innovation (CIGI). “The ratio of consumption to GDP in China is still significantly lower than major economies in the world. However, persistent problems in income distribution and the social security safety net in China have prevented consumption from becoming the major driving force for economic growth in the recent decade.”
Looking at the expenditure trends around public holidays shows further room for expansion. Ms Yan says: “There has been a growth in confidence, seen mostly after Chinese New Year, with the return of domestic tourism. This helped the catering and hospitality sector to recover with increased consumer confidence.”
However, again, the figures are not yet reaching previous levels. “This year’s holiday season was far from normal,” says Mark Kruger, senior fellow at CIGI. “In fact, had tourists spent as much in 2021 as they did to welcome the Year of the Pig in 2019, it would have added another 1% to quarter-over-quarter growth.”
The recovery is still hinged on how quickly China can return to normal levels of activity. The country is still battling localised outbreaks of the virus with lockdowns, while the Delta variant, first identified in India, is also causing flare-ups. Guangzhou tested its entire population at the beginning of June 2021 after the strain was identified. At the time of writing, China had administered 904.13 million doses of Covid vaccines, at a rate of around 10 million doses per day. However, there is a long way to go to double vaccinate a population of 1.4 billion.
“A full normalisation of the economy, especially for household consumption to fully catch up with the income growth, depends on the pace of vaccination, which is still low in China given the large population,” Ms García-Herrero says. “Recently, China has clearly sped up the pace of vaccination, so the propensity to consume is expected to rise steadily. However, China’s exports will probably slow down as the major competitors start to resume production.”
Innovation continues
One sector that has gained from the restrictions of lockdowns during the pandemic is e-commerce. McKinsey’s Covid-19 China consumer survey found online grocery sales grew by up to 20 percentage points during the pandemic. It expects around 6% of the increase to stick, as more than 55% of Chinese consumers said they are likely to buy groceries online permanently.
“The pivot towards e-commerce has played a huge part in the consumption growth, but has also helped to keep unemployment levels low as farmers and start-ups have been able to sell their products online,” Ms Yan says. “It is not just the big corporates, but the small entrepreneurs. New platforms have emerged, which have been helped by the move to e-payments, with no physical money changing hands.”
Though Alibaba and JD.com continue to dominate, smaller retailers are also expanding their market presence. Clothing retailers Shien and VIP.com, for example, have both expanded internationally. Meanwhile, Dingdong Maicai and MissFresh, two grocery apps, both filed for initial public offerings in the US at the beginning of June 2021. And this is just the tip of the iceberg.
The development of new industries is so important for China’s future growth
While the explosion of the online retailers has fed into Chinese economic expansion, there is still scope for the country to move up the global supply chain by leveraging its tradition of technological innovation. “In the years since 2018, China has put more focus on frontier technologies such as 5G, artificial intelligence, the Internet of Things, blockchain, big data and related intellectual property and standards to support China’s transition into a real powerhouse in the age of the digital economy for sustainable economic growth,” says Mr He.
The continuous development of its industries, and having a workforce with the ability to operate them, should be a priority if China is to continue to grow. “The development of new industries, such as renewable energy, and increasing productivity through training a skilled workforce and enhanced digitisation is so important for China’s future growth,” says Ms Yan.
Demographic changes
Maintaining this rate of economic growth is also dependent on having a huge workforce with disposable income. Irrespective of the impact of the pandemic, the issue of China’s ageing population has been ongoing for more than a decade.
During 2021, the NBS released its census, which showed the size of the population had stagnated. Compared with the 2010 census, the population share for those aged 0-14 years grew just 1.35%, while the number of work-aged individuals of 15-59 years declined by 6.79%. The over-60 age group increased by 5.44%, and comprises 18.7% of the population. It is likely China will lose its title of the world’s most populous country to India by 2027, according to the UN — though some suggest this may happen sooner.
In 2016, the government relaxed the one-child policy that had been in place since 1979, permitting families to have two children. However, this has not resulted in the expected population increase, so in May 2021 the government announced a three-child limit. There are some questions on how much difference this will make, however. Mr He says: “Policy adjustments in population, including the three-child policy, are too little, too late, and will not have an instant effect for keeping up economic growth in China.”
Finding the root cause of the low birth rate will bring about the greatest change, says Mr Sheng. “To encourage fertility, we need to tackle [the] economic and social factors leading to fertility decline, for instance, [by] reducing living and education costs. Furthermore, innovation will play a growing important role in economic growth. We should lay more emphasis on improving total factor productivity by technological progress.”
Jinny Yan, ICBC Standard Bank
Ms Yan suggests providing greater support for the older population will create a better outcome for the younger demographic: “The focus should be on investing more in healthcare and welfare, and making sure the ageing population does not become a fiscal burden,” she says. “We may see more borrowing from the working population to support the ageing population. Another solution is to raise the retirement age, which would have an impact on productivity. It is currently still 60 for men and 55 for women, and that hasn’t changed in four decades.”
Dr Yu Lingqu, deputy director of finance and the modern industry department at the China Development Institute, says China could learn from developed countries by improving labour quality, developing higher education programmes and supporting start-ups. He is also in favour of increasing the retirement age. “For 60-year-old labourers, retirement is needed; however, in the future, for those who engage in intellectual and innovative activities, a 60-year-old is still in the prime of their life,” he says.
Immigration question
In some respects, the elephant in the room when tackling stagnating population numbers is to open up the borders to greater numbers of economic migrants. Figures from the UN Department of Economic and Social Affairs estimates there were 1.03 million international migrants living in China in 2019, representing 0.1% of the population. The median age was 35 years.
“What hasn’t been talked about in China is encouraging migration,” Ms Yan says. “Opening up migration to specific skill sets for migrants, especially from neighbouring Asian countries and countries within the Regional Co-operation Economic Partnership agreement could be discussed — but there hasn’t much talk of this yet officially.”
China has largely depended on domestic migration in the past, but even these numbers are in decline. During the first quarter of 2021, the NBS reported there were more than 170 million rural migrant labourers, representing a decline of 2.46 million compared to the same period of 2019. Mr Kruger at CIGI says: “Migrants’ wages rose by 14% in the first quarter, bringing them back to trend, and suggesting that migrant workers are in short supply. This is consistent with the findings of a NBS survey of 90,000 firms, who reported that recruitment was the biggest challenge they faced and one which has grown over time.”
In the near term, the Chinese economy looks set to continue to grow, thanks to the international recovery from Covid-19 and its own rising domestic demand. However, with much larger factors also pressing on its economy, China will need to reconsider how it chooses to progress to remain on an upward trajectory in terms of economic growth.
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