NICHOLAS SHUBITZ: Chinese economy is thriving despite talk to the contrary

While China’s economic growth rate has slowed from the lofty highs of the early 2010s, declining property prices have made housing more affordable, inflation is low, real wages are rising, and the economy is becoming better diversified. Scratch under the surface of the headline numbers and you start to understand why the country’s citizens seem so satisfied.

China is clearly undergoing a structural shift with an emphasis on high-quality growth rather than rapid economic expansion. GDP growth has moderated to about 5% since the pandemic, down from 6%-8% per year between 2012 and 2019 and the double-digit growth in years prior.

While this is often touted as a sign of an economic slowdown, this decline in annual GDP growth is attributable to a reduction in the base effect. China’s economy is far bigger now, so even the same growth in absolute terms reflects as a lower value in relative terms. As such, China’s growing trade surplus may better reflect its ongoing manufacturing-led expansion.   

It is also important to remember that increasing nominal GDP in China translates to an even higher growth rate in GDP by purchasing power parity. This is because the price of goods and services in China is not subject to the same price level and inflationary pressures as in other economies.     

Nevertheless, various news stories have called China’s economic situation a “crisis” and many commentators have written extensively about the country’s demographic issues and potential “Japanification”. Reputable economists have forecast how the Chinese economy may never catch up with the US and the Chinese stock market has objectively underperformed. 

China's contradiction

That said, people living in China appear quite pleased with the way things are, compared with the rapid economic expansion and polluted skylines of the early 2000s. Foreigners seem to feel the same way, with inbound tourist numbers increasing to record highs as people from around the world flock to see China’s gleaming cities with their own eyes.   

There are some interesting data points to consider when trying to resolve this contradiction and better understand contemporary China. For a start, because the property sector in China has been contracting, the rest of the economy has been growing faster than 5% to offset this decline.

So while the property sector as a share of China’s GDP has fallen below 20% for the first time in decades, this much-needed rebalancing brings China more in line with high income countries and has allowed more capital to be directed towards other industries.      

According the Bank for International Settlements, China’s house prices have fallen 14% since their peak in 2021. This has hurt homeowners and put pressure on consumer spending. But this also means housing has become more affordable, which has benefited younger buyers.   

According to analysis from HSBC, 70% of millennials in China own their own home, which is double the rate of home ownership among US millennials. Similarly, according to the National Association of Realtors the median age of homebuyers in the US is now an astonishing 56, roughly 20 years older than the Chinese average.

So while some high profile developers went bankrupt, relatively few Chinese households got into financial trouble from falling housing prices as the average mortgage is typically less than 50% of the total property value. This is because down payments tend to be higher in China, which also has a famously high household savings rate. 

Benefiting ordinary citizens

These factors mitigated some of the fallout from the housing crisis compared with what might have unfolded in another country. This also explains why China’s housing market crisis did not lead to a broad-based economic contraction as some economists predicted.    

The housing market started to stabilise in the second half of 2024, with the government buying up a lot of the surplus supply for affordable housing. This is a prime example of how government policies and macroeconomic trends in China, even in crisis, tend to benefit ordinary citizens. 

Another benefit of the slowdown in the Chinese economy and the shift from real estate-led growth to manufacturing-led growth has been far lower levels of inflation. While the rest of world has experienced rising prices in recent years, food, automobiles, consumer goods, electronics, utilities, telecom services and public transport costs have all been flat or declining in China.

New cars have become particularly affordable, in contrast with the US and EU, where prices for both new and used cars have risen sharply, adding to the cost of living crisis unfolding in the West. Annual household income growth for the past five years in China has also averaged over 6%, while urban retirement income has been raising by 3%-5% annually for over a decade, far outpacing consumer price inflation, which has fallen below 2% since the pandemic.   

If Chinese pensions and wages continue to rise faster than inflation and citizens feel confident about deploying more of their substantial household savings, China could boost consumption to drive continued economic growth regardless of external headwinds.

Per capita consumption in China remains below levels seen in other advanced economies, and while Chinese citizens may never have to spend as much as their Western peers due to superior public services and lower price levels, there is still potential for more consumption led growth.

While luxury spending has declined, middle class consumption is already growing, with China’s per capita average daily protein intake having already surpassed the US, according to the World Health Organisation. China is already the world’s second largest importer, receiving vast quantities of soybeans, wheat, beef, seafood and fruits from its Brics partners.

Discretionary consumer spending has bounced back to pre-Covid level, with travel expenditure, education and entertainment spending achieving double-digit growth. A record 4-billion trips took place during this year’s Chinese New Year, with four films each grossing more than $150m at the Chinese box office, which grew about 20% year-on-year to reach a record $1.33bn.

Trade surplus

Apart from consumer spending, China’s global trade reached a record of $6-trillion last year, with an unprecedented $1-trillion trade surplus. This is largely the result of China’s lead in various high tech export industries, including EVs, photovoltaics, renewable energy and humanoid robots, which are helping improve air quality and living standards. 

Despite sanctions and restrictions, China has also made progress in both the chip fabrication and commercial aviation industries. China is believed to have developed indigenous technology for 3nm chip production, while China’s national aerospace manufacturer, Comac, takes a bigger slice of the narrow-body passenger aircraft market as Boeing flounders.

So despite the much-touted slowdown in nominal GDP growth, based on a number of other less often reported metrics, China’s economy is flourishing. More importantly, ordinary citizens are benefiting from affordable housing, low inflation, rising wages and clear skies.    

• Shubitz is an independent Brics analyst.