China must look beyond short-term recovery to focus on its long-term economic transformation

China’s economy is entering a new phase of slower growth and policymakers need to respond
Officials must reaffirm their support for private enterprise, while doubling down on green investments to encourage sustainable and high-quality growth

Stuart P.M. Mackintosh

Published: 1:00am, 28 Jan 2023

Why you can trust SCMP

A China slowdown was always on the cards – the economic history of development and industrialisation cycles in Asia and elsewhere show us as much. The four Asian tigers started fast, with growth accelerating rapidly, and for an extended period they significantly outperformed advanced economies, as their economies and societies evolved.

But this period of rapid catch-up is not endless. As any country – even mighty China – gets closer to the level of sophistication of advanced economies, the growth engine will slow, and enter a new phase. The precise timing of this tipping point is hard to judge, but not its inevitability.

In 2023, multiple challenges facing China in the Year of the Rabbit are striking for their size, complexity and interconnectedness. President Xi Jinping must confront the suddenness of the slowdown, with growth close to a 46-year low at 2.9 per cent in the fourth quarter of 2022.

We can debate the political and economic interconnections of the zero-Covid and post-zero-Covid policies and responses. But the impacts are real. China’s stock markets slipped, and then recovered somewhat.

But housing is the bearer of really bad news. House prices in 100 cities have fallen for six months straight, and consumer confidence has dropped. China’s policymakers face a series of economic shocks that could spur negative dynamics, exacerbating the extent of the slowdown and its short-to-medium-term effects on stability.

Policymakers need to respond by being consistent in messaging and actions related to the continued importance of the market economy to China’s future prosperity. Recently, there have been signals from figures such as Guo Shuqing of the People’s Bank of China (PBOC) that the central bank understands the importance of China’s dynamic private enterprises. But will they be sufficient? I don’t believe so.

Messaging by the 20th party congress did not underscore markets and private-sector drivers. Instead, other narratives, including the centrality of state actions, strength and ideology, were more evident.

A textual analysis of Xi’s report to Congress by Politico reveals a downgrading of references to “reforms” – used only 48 times in some 33,000 words – the lowest tally since 1982. References to the importance of the “market” only occurred 16 times.

External investors and China’s businesspeople are not fools. They read the exhortations on the propaganda banners and can interpret press coverage of the party congress.

As China’s economy slows, future expectations matter. Already, business confidence in China is at a near-10-year low; some of that is Covid-related; some cyclical; but a portion may be reflective of the perceived anti-market stance among key leaders.

So, China’s leaders need to do more to reassure markets and investors publicly, and demonstrate through actions by the PBOC, other regulators, and government policymakers, that they understand the country’s future growth requires open markets, as well as effective state actions. If China is to reverse an outflow of foreign capital, this messaging is needed.

Guo Shuqing, Communist Party chief at the People’s Bank of China and chairman of the China Banking and Insurance Regulatory Commission. Photo: Simon Song

Policymakers should also moderate constraints on China’s tech giants and permit dynamic market-based private-sector firms to innovate, iterate, invent and proliferate. Guo has stressed that the tech takedown is “basically” over. I hope he is right. We must wait and see if key regulators, starting with the National Development and Reform Commission, and including the China Securities Regulatory Commission and the China Banking and Insurance Regulatory Commission, also send similar messages in their statements and policy actions.

China’s policymakers should double down on their investment in the net-zero transition, and related technological and industrial transformations. Already, China leads on rare earth minerals, batteries, electric vehicles, solar and wind. America is finally taking a similar path – sparking an investment boom. Europe, too, is committed to its net-zero targets and is changing its markets and incentives.

Looking ahead, China is well placed to outperform other nations in this urgent green globalisation race. Going green in energy can power the green industrialisation and technological changes that are part of the development of a sustainable future in which China will play a leading role.

As China adjusts its narratives, signals and policies to reorient and support market-underpinned economic growth domestically, leaders should continue to seek out opportunities for international cooperation and collaboration, even though geopolitical tensions are high.

Batteries for use in electric vehicles are seen at a factory in Nanjing, in China’s eastern Jiangsu province. Photo: AFP

Recognition that, in the near-term, US-China tensions and rivalry will remain intense and difficult should not mean cooperation and coordination are impossible. China and the US need to find areas where constructive engagement is possible and productive.

The talks between Vice-Premier Liu He, and US Treasury Secretary Janet Yellen were a good step. Such discussions should continue. History shows us that great powers that do not talk to one another become afraid of their own made-up worst nightmare scenarios, rather than seeking out methods of coexistence and competition.

There are no doubt areas on climate change goals and commitments, multilateral lending institution reforms, strategic issues such as North Korea, and regulatory standards for global markets (be that carbon or financial).

China and the US must keep looking for areas of collaboration, agreement and forward momentum. Doing so increases mutual understanding even where there is continued tension and disputation between the two giants.

Ultimately, our future global growth and prosperity requires a multifaceted geopolitical balance. A balance between markets, private actors and industrial policy, which will be different in and between China and America. But each state needs the other to be a part of the solution to a future expansion of sustainable global economic growth. They cannot win the future alone; only via collaboration and in competition with one another.

Stuart P.M. Mackintosh is executive director of the Group of Thirty and author of Climate Crisis Economics