Pacific Dialogue
Chinese economy, in all fairness
By Liang Xiao  ·  2024-01-15  ·   Source: NO.3 JANUARY 18, 2024

Entering the year of 2024, downbeat voices on the Chinese economy still seem to be the mainstream in the Western world.

It's an undeniable fact that China's economy has faced difficulties. From July to September 2023, direct investment liabilities—a broad measure of foreign direct investment that includes foreign companies' retained earnings in China—recorded the first quarterly shortfall since China's foreign exchange regulator began compiling the data in 1998. Additionally, according to the General Administration of Customs of China, the country's exports fell by 5.2 percent in the first 11 months of 2023 (in U.S. dollar terms)—quite rare for China, which is known as the "world's factory."

Has China truly fallen into the "middle income trap?" The term refers to the notion that emerging economies grow quickly out of poverty only to be trapped in the middle income bracket before they reach high-income status. In all fairness, it may not be the case.

Discussing China's economy necessitates consideration of the current international economic situation. Since March 2022, when the U.S. Federal Reserve began its 11 most radical interest rate hikes in the last 40 years, the U.S. savings interest rate has reached an astonishing 5.25 percent. Coupled with the strong performance of the U.S. stock market in 2023, which attracted a substantial inflow of global capital into the United States, not only was inflation suppressed, but the U.S. economy also achieved growth beyond expectations.

But this economic miracle is based on the global financial hegemony of the United States, reaping the wealth of other nations to pay its own bills and greatly affecting the recovery of the world economy. Almost the whole world is suffering when the U.S. economy is roaring. For instance, in 2023, the European economy faced severe challenges. In the third quarter, the GDP of the eurozone contracted by 0.1 percent quarter over quarter, and the EU's GDP experienced zero growth on a quarterly basis.

The rapid economic growth of China over the past decades has attributed to the confidence that Chinese people have had for the future. Almost all Chinese people firmly believe that their income will increase year by year, that their fixed assets will continue to appreciate, and that their succeeding generations will enjoy a better life. It is this confidence that motivates Chinese people to take loans to buy, or invest in, real estate far beyond their income, to spend a lot of money in their children's education and, for many families, to use all of their savings to send their children abroad to study.

The current challenges will certainly change many people's existing plans, but this may also be an opportunity for self-adjustment. When China's economy no longer relies on government-led large-scale infrastructure investment and export-oriented industrialization, the economic structure's shift from investment-driven to consumption-driven becomes an inevitable trend. China aims to further increase the household income, expand the scale of the middle-income group, and make sure everyone enjoys the benefits of economic growth.

Despite the changing international landscape, the foundation of the Chinese economy has remained remarkably stable. China is one of the few countries in the world with a complete industrial chain, leading the world in industrialization, and continuously enhancing its technological innovation capabilities. In 2023, it became the global leader in the production of new-energy vehicles, ranked first in automobile exports globally, broke through the semiconductor blockade imposed by the United States, put domestically produced large passenger aircraft into commercial use, built its first large cruise ship, and more.

Moreover, it's essential to note that despite an aging population, China's demographic size, with a population of 1.4 billion, will remain substantial for many years to come. Temporary difficulties have not deterred the Chinese people's unwavering determination to strive for a better life. Domestic consumption has become the main driving force for economic growth. In the first three quarters of 2023, consumption contributed 83.2 percent to economic growth and propelled GDP growth by 4.4 percentage points. This 83.2 percent far surpassed the annual average of 59.5 percent from 2017 to 2019.

The United States had a per-capita disposable annual income of $45,343 in 2022, whereas China's was only $5,487, a difference of nearly 9 times. Although it's unrealistic to anticipate China matching the United States in terms of per-capita income in the near future, there is substantial potential for growth, and the Chinese market still offers many opportunities.

In traditional Chinese philosophy, there is a saying that "good fortune lies within bad, bad fortune lurks within good." This implies that every cloud has a silver lining and that the wise can perceive challenges in times of prosperity and seize opportunities in times of adversity.

The same is true for China's economy. 

Copyedited by G.P. Wilson

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