In China, change is in the air. The country's external markets are being disrupted by slowing economic development, increased political tensions between China and the US, and supply chain reconfiguration on a worldwide scale. The Chinese economy has to recover more quickly, and the new leadership has a lot of work to do.

In order to increase domestic consumption, China must cut saving rates and raise real wages as it shifts its trade and investment away from the US and towards regional Asian countries. The good news is that consumers are already feeling more secure as a result of the government's recent efforts to promote private firms and stabilise home prices.

We examined tactics and policies for the new government as it deals with four significant shifts in the Chinese economy in the most recent edition of our China economic focus. For a summary, continue reading, or go to the store to read the whole thing.

1. A new administration and new regulations

At the National People's Congress in March, Xi Jinping was re-elected as president and Li Qiang was appointed as the country's new premier. We anticipate that the government's short- to medium-term policies will alter in order to help the recovery of the Chinese economy, even while the top leader has not changed and the long-term policy of "dual circulation" continues.

2. The economy's reopening

The government has set a GDP growth target for this year that is less than anticipated, at about 5%. Although we believe this estimate to be fairly modest, it is still possible that China's recovery will be more difficult and that government support may fall short of expectations. 5.5% GDP growth is what Wood Mackenzie expects to see this year. Nevertheless, 7% growth is not inconceivable if China works hard to make up ground lost due to the pandemic. In the March issue of Horizons: The Great Reopening, we discussed how a hotter economy would affect commodities and natural resources.

3. Adapting outside markets 

China's exports are expected to decline in 2023 as a result of the slowdown in the world economy. In comparison to the same period in 2022, exports decreased 6.8% in the first two months of this year. In addition, a number of recent events, such as technology roadblocks and the Chinese balloon incident, have further harmed US-China relations. For financial, security, and political reasons, the world's supply chain is attempting to diversify away from China.

China is responding by shifting commerce and investment to the nations along the Belt and Road. The Regional Comprehensive Economic Partnership (RCEP), which went into force on January 1, 2022, has been promoted by the nation. The Association of Southeast Asian Nations (ASEAN), eastern Asia and Oceania has 15 members, and the RCEP aims to lower tariffs between them.

In accordance with the RCEP's requirements and its eight free trade agreements with nations in Latin America, Asia, and Europe, China has also been lowering import duties. China's import tariffs for the rest of the world decreased from 8% in early 2018 to 6.5% by the end of 2022, according to a calculation by the Peterson Institute for International Economics, but levies for the US jumped from 8% to 21.2%.

Beyond the immediate future, China's competitiveness will be tested. Its cost advantage is already waning, particularly for middle- and low-end products.

 

As a result, increasing domestic demand is now more crucial, and China has ground to make up. The economy was 3% behind where we anticipated it to be at the end of 2022 based on its pre-Covid trend.

 

4.Quantity to Quality

China is struggling with its population. In 2022, its overall population began to decline, and urbanisation is also drastically slowing. Premier Li emphasised that quality-driven growth would take the place of growth that was quantity-driven. But in order to do so, the government will require a fresh set of consumption-supporting policy instruments.

A methodical consumer revival strategy is required. Although the government work report of the Congress meeting lists increasing domestic consumption as a priority, specific stimulus measures are lacking. Some local governments offer incentives to increase consumption. Twelve provinces provide financial assistance for the purchase of automobiles, and certain towns offer discounts on home equipment. Such actions are classic examples of government policy tools that just forecast future demand and infrequently generate new demand.

The key task facing the new administration is to increase people's inclination to consume and lower China's extremely high saving rates through enhancing family security.