China has begun transformations that will be long-lasting.
The history of China is a long tale of dynasties and strong leaders stretching back to antiquity. As the year 2023 commences, China will start a new year moving in a new economic direction.
China's recent era of growth was led by a massive export initiative. With a formula of state sponsorship and foreign investment, the nation overtook the productive capacity of the rest of the world. But that era has come to an end: Tensions between China and its trading partners have been rising for a number of years, and the pandemic showed all nations the risk of concentrating production in just one region. If the world continues to decouple, China has the most to lose.
In the year ahead, China must overcome some significant challenges. As China matured, it needed to rebalance its economic mix toward more domestic consumption. Progress had been slow on this front before COVID-19, and pandemic lockdowns have taken a toll on consumer sentiment.
"In the year ahead, China must overcome some significant challenges."
The nation’s manufacturing infrastructure also continues to labor under stringent COVID-19 protocols. The virus has proven intractable, and China would do well to learn to live productively with it.
China must also attempt a soft landing of its real estate market. As part of the nation's rapid expansion, developers were eager to build as much as possible, and savers were ready to offer capital to get projects started. But the system grew over-leveraged, with developers unable to finish projects and funders not receiving finished properties. There is no painless solution: some investors and banks will realize losses, and construction can no longer be an easy source of jobs and quick investment returns.
China will face demographic challenges for a long time to come. Birth rates are falling fast, and immigration is not much of an option. If the nation is going to make major advancements in technology, now will be the most opportune time to do so.
"The growth outlook for China's economy in the new year is slower than its recent norms."
China enters this critical period of transition with stable leadership. President Xi Jinping has begun a third term as President, alongside party leadership with deep loyalty to his priorities. While we are not military experts, worries about China invading Taiwan are in the forefront. In that event, sanctions would be severe and commercial links with China would be rapidly severed. But prospective economic damage may not be a sufficient deterrent.
We do not expect significant changes from the People's Bank of China next year. In the course of the pandemic, the central bank only marginally lowered its overnight lending rate; as the nation's prospects slowed in 2022, it went against the global tide and cut rates by a symbolic 10 basis points. Monetary policy will continue to support fiscal policy as needed.
The growth outlook for China's economy in the new year is slower than its recent norms. After targeting and achieving growth of at least 6% for nearly three decades, China will now shift into a slower gear. For many in the nation accustomed to rapid progress and a rising standard of living, this may feel recessionary. Younger Chinese citizens may experience cyclical economic phenomena like unemployment and default for the first time.
Chinese leaders are reputed to think beyond themselves or their lifetimes, focusing instead on the nation's advancement as a great power over long time horizons. Xi has an opportunity to steer China towards a more sustainable future, but he will have to navigate around a series of potential hazards to get there.
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