China trip notes

I visited Beijing from April 11 to April 20th to meet with representatives of China’s corporates, universities and think-tanks. My overall impression is that while consumption and tourism are yet recover more emphatically from the pandemic lows, there are no signs of a “confidence crisis” or loss of direction. What was perhaps most encouraging was the intensity of competition and innovation in China’s corporate sector that will likely be key to boosting the dynamism of China’s economy in the longer term. The main macroeconomic questions revolve around China’s consumer – my sense was that there is scope for the household consumption to recover, in which case the pressures to forge ahead with higher growth in investment would be attenuated, thus reducing concerns regarding China’s “overcapacity problem”.

Beijing as a city has been transformed in the past decade not only in terms of new modernistic architecture, but also by the Zeitgeist of our time – the digital and the green transformation of the economy. Compared to 7 years ago (the last time that I was in Beijing) there is significantly less air pollution in the city, something that was a result of a concerted effort aimed at bringing greater environmental awareness and sustainability into China’s capital. There were also less street slogans on billboards, less construction and much more consumerism and digital economy attributes. The most common mode of payment appeared to be Alipay, with the share of cash transactions appearing to be relatively low. These observations while limited to just one city may be indicative of the transformation that the rest of China’s economy is set to experience in the coming decades.    

In the middle of April China released its macroeconomic data for March 2024 that showed positive GDP growth figures for the first quarter, with lower than expected figures for household consumption. China’s GDP grew 5.3% YoY in January-March 2024 well above the analysts’ forecast of 4.6% expansion and higher than the 5.2% growth in the previous quarter. On a quarterly basis growth accelerated to 1.6% from 1.4% in the previous three months. Across the main GDP growth drivers, it was fixed investment growth of 4.5% (compared to expectations of 4.1% YoY) that accounted for some of the over-performance in GDP dynamics. At the same time, retail sales statistics disappointed with consumption growing 3.1% year-on-year in March, falling short of the 4.6% growth forecast and showing a marked deceleration compared to a 5.5% growth in the January-February period[1]. Quite naturally then the focus in the macroeconomic discussions focused on the state of the Chinese consumer.

In terms of the consumer trends a cursory look at the state of play in Beijing’s shopping malls in the center suggests that consumption is yet to stage a comeback from previous years of weakness. At the same time representatives of Chinese companies involved in the e-commerce segment pointed to positive regional trends in consumption, in particular the spillovers in consumption from Beijing and Shanghai to the surrounding regions. There was also a positive consumption dynamic that was noted for regions such as Heilongjiang (North-East of the country) as well as parts of the country’s North-West. There was also a clear trend towards longer travels by Chinese tourists within the country after the lifting of the Covid restrictions.  Perhaps most interestingly, companies pointed to the importance of generational trends in China’s consumption, in particular the rising dynamism and versatility in the consumption patterns of the young generation. Generation Z (born between 1995 and 2009) that accounts for nearly 19% of the country’s population sets off consumer trends such as emphasis on health wellness, importance of brands and new digital products and services. There are also signs that Gen Z in China is exhibiting greater proclivity towards environmental and sustainable consumption – a trend that will need to be increasingly taken into account by the corporates.

In the environmental sphere, the scale of adoption of ESG standards by China’s corporates is rather moderate, though when companies plan to go public they almost universally follow the rules governing the disclosure of such policies and standards to investors. This in turn suggests that there is an important link between the pace of adoption of ESG standards in China’s corporate sector and the development of China’s capital markets. One of the examples of such linkages emerged earlier this year when China’s mainland stock exchanges called for sweeping environmental disclosure rules for large listed companies, with the “Shanghai, Shenzhen and Beijing exchanges taking a double materiality approach, requiring companies to report on the impact that their activities have on the environment as well as the risks and impact of environmental factors on their business. Around half of China’s listed companies will be obliged to carry out the reporting, including the biggest 180 listed in Shanghai (the SSE 180) along with the top 50 firms on the exchange’s Star 50 science and technology board[2].”

On the much discussed “China over-capacity” problem, the main line from the respondents appears to have been that industrial policy and state support has been increasingly used across the globe, including in the advanced economies. In China’s case it appears that there are more resources, coordination and planning to direct state support towards priority sectors that are seen as crucial for China’s competitive advantage on the international stage. At the same time, it was noted that concerns around “China’s overcapacity” were likely to diminish in case China were to proceed with the transition to growth that is more based on the expansion of the consumer and services sectors rather than ever higher investments from the state in manufacturing.     

With respect to BRICS, China does seem to view this platform as key in its outreach to the developing world, including via the BRICS+ framework. At the same time, there does not yet appear to be a clear blueprint for some of the key trajectories of BRICS economic development, including with respect to trade liberalization. The latter would be instrumental for China in opening markets for its products across the Global South and facilitating export-led growth to complement other drivers of its economic expansion. There also seems to be little interest and clarity on how the “integration of integrations” phase of BRICS development (via bringing together the main regional integration blocs of the Global South) would prove superior to the current approach of expanding the ranks of the BRICS core via admitting large developing economies.  

Interestingly, Trump and US politics were hardly mentioned in any of the meetings, which suggests that this scenario is already incorporated into China’s expectations – the re-orientation of trade flows towards the Global South away from the developed world may be part of this adjustment in expectations. Another explanation may be that Biden’s activism in introducing new restrictions on China has blurred the boundaries and differences in China’s perceptions of the two camps in terms of US treatment of China’s economy.  

There was naturally much skepticism during the meetings regarding the much discussed “peak China” paradigm. Some of the Chinese scholars reasoned that it was too early to write off China on account of demographics or lower investment in view of the centrality of productivity/efficiency improvements in the longer term performance of its economy. In this respect the technological advances made by China in the sphere of digital and green economy bode well for its ability to transition to higher quality and more broad-based growth. Furthermore, not all of China’s reserves of catch-up growth have been exhausted – this refers in particular to growth in services and consumption as well as the accelerated expansion of inward regions of China. Nevertheless, challenges and headwinds abound, most notably with respect to the main economic battle of the 21st century – the AI race. Leadership in the world economy in the coming years will be increasingly determined by the ability of key contenders in the AI race to attract top talent – something that China is yet to achieve vis-à-vis the US and the EU. Indeed, the feedback from companies and corporate associations clearly pointed to lack of qualified labour as being the single most important constraint for foreign companies in China.   

In the end, my main conclusion was that there may have been an overshooting in the “peak China” rhetoric and the FDI outflows observed throughout the past year. China holds the initiative in a number of key segments of the global economy (EVs, batteries, solar panels, key natural resources such as rare-earth minerals), its platform of international alliances is set to further expand on the back of BRICS+ and refinements in the Belt and Road Initiative (BRI). With localization being such an important factor in the competitive race to reach the Chinese consumer, a recovery in demand and household consumption in China may well necessitate a re-think for those multinationals that opted to scale down their presence in China.



Image by jplenio via Pixabay

Yaroslav Lissovolik, Founder, BRICS+ Analytics