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Other / InternationalChina is the second largest economy in the world and is now considered an upper-middle-income nation. Since opening up and reforming its economy in 1978, China’s gross domestic product (GDP) has steadily grown at an average of almost 10% annually.
However, China’s economic growth has slowed over the past few years due to various factors, including falling productivity, diminishing returns to investment, declining labour force growth and the Covid-19 pandemic.
Due to the outbreak, China’s economy increased by only 2% in 2020, its lowest annual growth rate in 45 years. In 2021, China was able to bring its lockdown-affected markets back to life and recorded a GDP growth of 8.1% year on year to $18 tn, up from $15.42 tn in 2020.
The rate of growth recorded in 2021 was the fastest in over a decade and was far higher than the government’s aim of 6%.
China GDP Full Year Growth Rate (in %)
However, the tables have turned and the International Monetary Fund (IMF) reduced its growth forecast for China to 3.2% for 2022 in October, citing severe mobility restrictions due to Covid, real estate sector upheaval and banking woes surrounding the sector, and reduction in consumption figures as reasons. According to the IMF, growth is expected to reach 4.4% in 2023 and 4.5% in 2024.
The country’s zero-Covid policy intended to contain the pandemic has resulted in additional limitations on corporate activity, adding to concerns about the economy’s recovery.
China Unemployment Rate (in %)
The urban unemployment rate in China remained relatively stable at 5.5% since June 2022, falling to 5.4% in July and 5.3% in August before seeing a slight rise to 5.5% in October.
The first eight months of the year saw China adding 8.98 million new jobs in urban areas across the mainland. This figure is already above the total jobs created in the entire year of 2020.
Currency and Central Bank
The Chinese currency is officially named Renminbi, which means “people’s currency,” in Chinese, but is more commonly known worldwide as the yuan.
The aggressive interest rate hikes by the U.S. Federal Reserve in 2022 have sent the yuan tumbling to all-time lows against the US dollar. Until November 23, 2022, the Chinese currency had lost 15% against the greenback this year.
China Inflation (in %)
While inflation has soared in the US and Europe, the consumer price index in China has remained dampened due to weak domestic demand. The IMF expects inflation of 2.2% in 2022.
China’s central bank, the People’s Bank of China (PBOC), kept monetary policy relatively loose so far, while other major central banks have tightened. As of November 23, the PBOC has cut its policy rates twice in 2022.
Industry and Trade
Manufacturing and agriculture remain the biggest sectors in China’s highly diversified economy but its services sector has become its biggest GDP contributor and job creator in the past few years.
Services’ share is more than half of the total GDP and it employs almost half of the country’s workforce. The largest contributors to China’s GDP remain industry, wholesale and retail trade, financial intermediation and agriculture. Real estate and construction also form a huge chunk of the economy.
The low labour cost in China has made it one of the most preferred destinations in terms of manufacturing outsourcing. Foreign capital is used in more than half of the exports made by Chinese companies.
Having the biggest population in the world, China is also one of the largest producers and consumers of agricultural products globally. While only 15% of the country’s soil is arable, it is still the leading producer of cereals, rice, cotton, potatoes and tea in the world.
The country’s main export products include transmission apparatus for radio-telephony, automatic data processing machines and units, electronic integrated circuits and micro-assemblies, and petroleum oils.
Meanwhile, its main import products include electronic integrated circuits and micro assemblies, petroleum oils, iron ores, petroleum gas, and motor vehicles.
The US, Hong Kong, Japan, South Korea, Vietnam, Australia, and Germany are China’s main trade partners.
China Balance of Trade
Survey and Rankings
In terms of economic freedom, the Heritage Foundation ranked the China economy at 158. in 2022 among 178 countries worldwide. This is a steep drop from the 117. position China held in the 2021 ranking. China received a score of 48 and fell under the “repressed” category. As per the Heritage Foundation, China’s growing political autocracy limits its economic prospects.
Stock Exchanges and Capital Markets
Investing in Chinese stocks was historically off-limits to foreign investors, but the market has slowly opened up as the government continued to loosen regulatory requirements.
China has two stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). In these exchanges, companies incorporated in the country may issue A-shares, B-shares, and H-shares.
Onshore A-shares and B-shares were previously restricted from foreign investors, but the Chinese government has launched various programs to allow them to participate in the onshore market.
Foreign investors looking to invest in Chinese stocks may do so through an exchange-traded fund (ETF) tracking one of the major indices, such as the SSE Composite Index and the SZSE Component Index. They may also use an actively managed mutual fund.
Bond Market
China’s domestic bond market is the second largest in the world, worth 140.26 tn renminbi (~$19.7 tn). Since 2016, when the market was opened to foreign investors, interest in China’s onshore bond market has steadily increased.
Foreign investors’ overall holdings in Chinese government bond surged to a record-high of $377 bn by November 2021, as per data by Chinabond. However, in 2022 the market saw strong outflows. Foreign investors’ overall holdings in Chinese government bonds were down to $3.38 tn by October 2022, as per data by China Central Depository & Clearing.
Real Estate Market
China’s real estate market has steadily grown alongside the country’s economic progress.
However, the growth in the property market slowed down since June 2021, as developers including real estate giants like Evergrande, Kaisa showed signs of financial distress, after regulators stepped up their deleveraging campaign.
Since the summer of 2020, when regulators stepped in to cut excess leverage, the property sector has tumbled, causing several builders to default on their debts and face challenges in completing projects, resulting more recently in homebuyers threatening to stop making payments.
According to China’s National Bureau of Statistics, real estate investment fell 4% in the first five months of this year compared to the same period the year before, despite overall growth in fixed asset investment. Home prices have been falling at a steady pace in 2022, with property sales down by 24.2%, almost double that of the projections.
China Housing Index (in %)
Source of charts: tradingeconomics.com
