China faces serious, short-term economic challenges

At a loading bay in Ezhou, an hour’s drive from Wuhan on the banks of the Yangtze River, a small army of workers were lifting cardboard boxes out of trucks and on to steel rollers. Each box was filled with smaller packages from ecommerce companies like Shein and Temu bound for New York’s JFK airport.
Here at Ezhou Huahu Airport, China’s first all-cargo airport, the busiest time is in the middle of the night when flights arrive with perishable foods for delivery across the country in the morning. At another loading bay, workers were handling boxes of fresh salmon from Chile while a customs and food safety inspection hall was filled with the distinct odour of the durian fruit landed from Thailand, a mixture of rotten eggs, honey and smelly feet.
Ezhou’s situation in the centre of China, with links by road, rail and river as well as domestic air routes, means that goods leaving the airport can reach almost anywhere in the country within a day. After two years in operation, Huahu is not yet among the world’s top 30 in terms of cargo but it hopes to do so next year.
Memphis International Airport, home to the FedEx Superhub, is currently the world’s busiest cargo airport. But Professor Zhao Wei from China’s Civil Aviation Management Institute believes Huahu has the potential to surpass Memphis.
“China’s express delivery business is the world’s biggest, and China’s trade is the world’s biggest, which is the market basis for it. At the same time, we have an efficient three-dimensional transport network in China, and we also have an efficient three-dimensional commercial network throughout the world,” she said.
“We see that SF Express is now the biggest integrated logistics transporter in the country. When China’s economy develops, what will SF Express become? The biggest in the world.”
Amid a prolonged property market slump and lacklustre domestic demand, exports have emerged as the essential driver of economic growth in China. In the first six months of this year, net exports of goods and services contributed almost 14 per cent to China’s economic growth, boosting GDP by 0.7 per cent.
But the export boom, which saw China’s trade surplus reach a record $99 billion in June, has caused disquiet among the country’s trading partners, notably in the United States and the European Union. This week, the European Commission confirmed new tariffs of up to 38 per cent on Chinese electric vehicles, a move followed a day later by Beijing’s announcement of a probe into EU subsidies for dairy products.
China’s position as the world’s leading exporter reflects the strength of its manufacturing sector and its industrial supply chain. But it also casts a light on a structural imbalance within the economy which has seen a heavy emphasis on investment rather than consumption.
Last month saw the Third Plenum, a five-yearly meeting of the Communist Party leadership that sets China’s economic policy course for the coming years. The meeting had been delayed for months, fuelling speculation that it would introduce major reforms to stimulate the economy and address the crisis in the property market.
Previous Third Plenums have seen China make dramatic course changes, notably in 1978 when Deng Xiaoping shifted the Communist Party’s focus from class struggle to economic development. The 1993 meeting saw another major move with the establishment of the socialist market economy and Xi Jinping’s first Third Plenum as general secretary in 2013 launched reforms across a number of sectors.
Last month’s meeting proposed 300 reform measures to be delivered by 2029, including some aimed at breaking down barriers to market access, improving access to finance and streamlining the legal and regulatory system. But the broad economic strategy remains the same, with a focus on strengthening supply chains and accelerating innovation in science and technology.
The blueprint for China’s current economic development strategy was set out in Made in China 2025, a plan drawn up in 2015 but no longer mentioned by the party leadership. This is not because it has been missing the plan’s targets but because its success has generated alarm among trading partners and provoked protectionist measures in response.
A decade ago, China stood on a lower rung of the global industrial value chain with factories mostly producing cheap, technologically unsophisticated goods. Everything from microchips and computer software to mobile phones and advanced machine tools were imported from the US and Europe.
Made in China 2025 set out to change that by fostering the scientific and technological development to enable Chinese manufacturers to make high-quality, high-tech products. It focused on specific sectors including information technology, robots, electric vehicles, green energy technology, medical devices and equipment for aerospace technology, maritime and rail transport.
China’s emergence as the world’s leading producer of electric vehicles is a consequence of the plan, with central and local governments subsidising manufacturers and building the charging infrastructure to make the cars attractive. The scale and fierce competitiveness of the Chinese market has improved efficiencies and ensured that the top producers like BYD and Geely can produce high-quality, attractive vehicles at low prices.
There are 55 million university students in China today and next year will see 77,000 awarded PhDs in STEM subjects. Most of these advanced STEM graduates will find jobs in state-funded institutions with generous funding for research.
China’s leaders believe that this combination of a highly educated workforce, a robust industrial supply chain and a vast, highly competitive internal market will see the success of its electric vehicles replicated in other sectors, starting with medical technology and artificial intelligence. In the meantime, however, the country faces serious, short-term economic challenges.
China’s target for economic growth in 2024 is 5 per cent of GDP, high by western standards but much lower than in the past. The International Monetary Fund (IMF) predicts that growth will slow next year to 4.5 per cent and although Chinese economists quibble about the precise figure, they agree about the direction of travel.
Xu Hongcai, deputy director of the China Policy Science Research Association’s Economic Policy Committee, believes that the next five years will be crucial for China’s economic development. Although the country remains a manufacturing powerhouse, domestic demand is weak, partly because consumption is being dragged down by the property market slump.
“Housing has now decreased as a proportion of residents’ consumption expenditure, dropping to just over 20 per cent. In previous years, housing consumption expenditure accounted for about 30 per cent of residents’ consumption expenditure. So the simultaneous decline in investment and consumption in the real estate market has a significant negative impact on our demand and economy,” he said.
Beijing has taken some steps to support the housing market, easing borrowing rules and enabling state-owned enterprises to buy unsold private apartments to convert into social housing. But nobody expects property to return to its previous position as a sector that once accounted for up to a quarter of economic activity.
Government initiatives such as trade-in schemes for household appliances have had a limited impact as falling property prices continue to sap consumer confidence. For Xu, the key to restoring consumer confidence and boosting domestic demand lies in improving incomes.
“Increasing income level mainly depends on developing the economy, especially the development of small and medium-sized enterprises and private businesses that can increase employment opportunities, thus improving income levels,” he said.
“We should also consider increasing the income level of low-income groups or improving their social security payments. We should accelerate the improvement of social security levels for farmers aged 60 and above. This gap is too large, which is also where our potential to expand consumption in the future lies. Our rural farmers have great consumption potential, but their income level is too low, which is also a reality of our national conditions.”
People in rural China receive much lower social welfare payments, including old age pensions, than their counterparts in the cities. Xu acknowledges that the gap cannot be closed in one step but favours a gradual rise in payments to those in the countryside.
China’s changing demographic structure has seen the population begin to decline in recent years as the proportion of those over 60 increases. Increasing pensions and expanding healthcare for seniors could stimulate economic growth but it will also add to the strain on public finances, particularly in local government.
For decades, provincial and municipal governments have drawn much of their revenue from land sales to property developers. But the property downturn has left many local governments deep in debt while land sales have dwindled.
Xu estimates that planned consumption taxes and transfers from central government could reduce by a quarter the RMB 4 trillion (€503 billion) shortfall in local government finances. Among the options for expanding the tax base are levies on environmentally damaging activities and the introduction of taxes that are common elsewhere but unknown in China.
“There are some new tax types that I think we have been exploring and can create the conditions for the timely introduction of, such as inheritance tax, capital gains tax and property tax. Taxation, as an effective policy tool to regulate income levels, is very popular internationally, whether it is property tax or inheritance tax. We do not have them in China yet,” he said.
“Property tax, which has been discussed for many years. But in the current context of a drastic adjustment in the property market, I personally think it may not be appropriate and will not be introduced in the short term.”
Xu suggests that China could also cut the cost of government, something it has already started to do with public service pay cuts and lay-offs. And he notes that many of the new technological advances China is pursuing will require fewer workers than under the current industrial model.
“In fact, this situation has occurred in the process of industrialisation in the past, but we should recognise the multilevel nature of China’s economic development. The space for the Chinese market is huge, and China’s population structure, including social structure, is also undergoing profound changes. The structure of demand is also changing, and there are many employment opportunities,” he said.
“Currently, there are about 11 million university graduates and graduate students every year, and about 240 million people nationwide have received higher education and professional vocational training. I think this is the human capital foundation for developing modern high-tech industries. We need to make full use of people’s talents and resources, and give full play to their roles. This is an important aspect of the driving force for China’s future economic development. However, there are still some problems with the institutional mechanisms, which suppress the enthusiasm for innovation and entrepreneurship.”