The China story

Growth has slowed, but dominance remains

Is China’s role in the world economy for the past few decades as the predominant generator of growth coming to an end? As some commentators have noted, China’s share of world gross domestic product (GDP) will shrink for the second year running in 2023. From 18.4 per cent of global GDP (measured in current dollars) in 2021, China will shrink relatively to 17 per cent in 2023. Other emerging nations and the United States will dominate growth in the ongoing year. This is a persuasive case, and reflects reasonable truths about the state of the Chinese economy internally. It is facing a difficult rebalancing amid a crisis in the real estate and construction sector, which has long been the driver of domestic growth. Certainly, it is increasingly clear to the rest of the world that China will no longer be the reliable source of investment and growth that it has been in past years. This has led some to assume that decoupling from the Chinese economy, or at best “de-risking”, is a relatively easy task — especially for countries that are already relatively poorly integrated into the global economy, such as India.

But another way of considering these same facts is that two decades of stellar Chinese growth that have taken it to this point are reflected in the degree to which the country is now one of the poles of the world economy. Its built infrastructure, dominance of supply chains, and excess capacity in multiple sectors relevant to global growth cannot be denied. Consider renewable energy: It is now widely accepted that the factories built in China to manufacture photovoltaic panels are sufficient to satisfy global demand on their own. Similar dominance is being established in battery manufacturing. While making advanced semiconductors remains a challenge, almost half of larger-scale semiconductors sufficient for most applications could be made in China. Legacy sectors like cars, petrochemicals, and shipbuilding see similar numbers.

Thus, although China’s growth spurt might have moderated to some extent, it does not mean it will be any less formidable an economic player. In fact, a Chinese economy looking for ways to revive growth while retaining an efficiency and capacity edge might be even more difficult to overcome for its challengers elsewhere in the emerging world. India cannot assume, in particular, that it will be able to inherit the drivers of Chinese growth. Mass manufacturing is showing little inclination to leave Chinese shores, and whatever is leaving China is not disproportionately favouring India as a target for its relocation. The very sectors India has chosen for its industrial policy like the production-linked incentive schemes are also those — such as batteries, semiconductors, and solar cells — where it will be battling much larger Chinese subsidies. After all, the legitimacy of the Chinese Communist Party’s iron-fisted rule over its population depends upon constant growth and improvement in living standards. It will try multiple ways to either revive growth or increase its dominance of supply chains to ensure it can continue to deliver domestic prosperity. Given the size of the economy, a slowdown in the rate of growth is inevitable, but it may not be the end of the China story.