China flag China: Economic and Political Overview

The economic context of China

Economic Indicators

China is the second-largest global economy, the largest exporter and has the largest exchange reserves in the world. However, even though China has one of the fastest-growing GDPs worldwide, its economic growth was abruptly slowed by the impact of the COVID-19 pandemic. After growing only 3% in 2022, the sudden abandonment of the zero-tolerance COVID-19 policy in late 2022 prompted a rapid recovery in the first quarter of 2023 when GDP surpassed expectations, expanding by 2.3% quarter-on-quarter, fueled by the resurgence of private consumption and state-owned enterprise investment. However, the rebound proved short-lived due to the deeper-than-expected impact of the pandemic, resulting in households maintaining high precautionary savings. Moreover, ongoing uncertainty from the real estate crisis continued to dampen consumer and investor confidence. Growth softened in the second quarter (0.5% q-o-q) as households, private enterprises, and local governments actively deleveraged, before regaining momentum in the third quarter (1.3% q-o-q). For the year as a whole, China's economy expanded by 5.2%, slightly surpassing the official target. However, the recovery proved much more fragile than anticipated by many analysts and investors. A deepening property crisis, increasing deflationary risks, and subdued demand have overshadowed the outlook for the current year. Projected to decline to 4.2% in 2024 and 4.1% in 2025 (IMF forecast), growth is anticipated to linger well below its pre-pandemic trend for both years. China's current growth model, reliant on substantial investment in real estate and infrastructure fueled by debt, is faltering, while new growth drivers remain underdeveloped. The expected continuation of household consumption recovery is forecasted for both 2024 and 2025.

Concerning public finances, China's fiscal revenue rose 6.4% in 2023, picking up significantly from a 0.6% increase in COVID-hit 2022, while fiscal expenditures rose 5.4% (official government data). The overall budget deficit was estimated at 6.6% of GDP and should remain stable in 2024 (IMF). Meanwhile, the debt-to-GDP ratio rose to 80%, up from 77% in 2022. The IMF expects the debt ratio to rise to 91.8% by 2025. Higher debt poses the most significant risk to China's economy in the next two years, exacerbated by the real estate crisis, which could potentially spill over into the financial sector. At the end of Q1 2023, total non-financial sector debt reached 306% of GDP, nearly 17 percentage points higher than the previous year and 40 points higher than in 2019. Servicing such massive debt, particularly corporate debt, is becoming increasingly challenging amidst the projected growth slowdown. Additional risks stem from weak investor and consumer confidence, geopolitical uncertainties, and adverse demographics. In 2023, China's economy avoided inflation caused by surging global energy and food prices due to its high food self-sufficiency rate and the substitution of some crude oil imports with discounted oil from Russia, resulting in an overall rate of only 0.7% albeit with a slight uptick expected this year (1.7% as per the IMF).

According to the Minister of Human Resources and Social Security, the low unemployment rate of these past years is largely due to the new digital economy and entrepreneurship. Many analysts say, however, that the government figure is an unreliable indicator of national employment levels, as it takes into account only employment in urban areas and does not measure the millions of migrant workers that arrive in the country every year. Despite the global context, the unemployment rate stood at 5.3% last year and should remain stable over the forecast horizon (IMF). A large gap remains between the living standard of the cities and the countryside, between urban zones on the Chinese coast and the interior and western parts of the country, as well as between the urban middle classes and those who have not been able to profit from the growth of recent decades. The COVID-19 pandemic also highlighted weaknesses in the health and social security systems and pushed many households and firms to the brink of bankruptcy. It further widened inequalities between central provinces that have been hardest hit and the coast; between poorer households that had already been indebted and wealthier households and between the private sector, which has limited access to infrastructure contracts and is hard hit by slackened demand and the state-owned sector. Such divides will need to be addressed by the central government to make growth inclusive and sustainable (OECD).

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 17,886.3317,700.9018,560.0119,781.7021,059.83
GDP (Constant Prices, Annual % Change) 3.05.04.24.14.1
GDP per Capita (USD) 12,67012,54113,15614,03114,952
General Government Balance (in % of GDP) -6.6-6.6-6.7-7.0-7.4
General Government Gross Debt (in % of GDP) 77.083.087.491.895.9
Inflation Rate (%) n/a0.71.72.22.2
Unemployment Rate (% of the Labour Force) 5.55.35.25.25.2
Current Account (billions USD) 401.86271.44250.86224.86207.85
Current Account (in % of GDP) 2.21.51.41.11.0

Source: IMF – World Economic Outlook Database, October 2021

Main Sectors of Industry

China has a highly diversified economy, dominated by the manufacturing and agricultural sectors. It is the most populated country in the world and one of the largest producers and consumers of agricultural products. The agricultural sector is estimated to employ 24% of the active population (World Bank, latest data available) and to account for 7.3% of GDP, although only 15% of the Chinese soil (about 1.2 M km²) is arable. China is the leading global producer of cereals, rice, cotton, potatoes and tea. In terms of livestock, it also dominates sheep and pork livestock farming as well as the world’s fish production. A series of plans have been aimed at transforming, modernising and diversifying agriculture to increase productivity. Data from the National Bureau of Statistics (NBS) show that China's grain output rose 1.3% year on year to a record high of 695.41 million tonnes in 2023, marking the ninth consecutive year with a grain harvest of over 650 million tonnes. Additionally, the country is rich in natural resources and has significant coal reserves (the country's primary energy source), which account for two-thirds of the total primary energy consumption. China is the world leader in the production of certain ores (tin, iron, gold, phosphates, zinc and titanium) and has significant petrol and natural gas reserves, making the country the 6th-biggest oil producer in the world, with 4.01 million barrels produced per day in 2023.

The industry sector contributed to approximately 39.9% of China's GDP and employed 28% of the population in 2022 (World Bank). China has become one of the most preferred destinations for the outsourcing of global manufacturing units thanks to its cheap labour market, despite an increase in labour costs in recent years. The country is a global leader in various manufacturing sectors like machinery manufacturing; electronics; textiles and garments; and steel and automobiles (the Chinese manufacturer BYD overtook Tesla to become the world's biggest electric car company in the final quarter of 2023). China’s economic growth has coincided primarily with the development of a competitive and outward-oriented manufacturing sector. More than half of the Chinese exports are made by companies with foreign capital. Their share in the sector's added value varies according to the industry: more than 60% for electronics and less than 20% for the majority of producer goods. The value-added industrial output went up 4.6% year on year in 2023 (data NBS). The output of the equipment manufacturing sector expanded 6.8% y-o-y in 2023, faster than the average industrial production growth. The production of solar batteries, new energy vehicles and power generation equipment surged 54%, 30.3%, and 28.5%, respectively.

The services sector in China has witnessed rapid expansion in the last decade, becoming the largest contributor to GDP (52.8%), surpassing manufacturing, and employing around 47% of the workforce (World Bank). Even though the sector's GDP share has been growing in recent years, the service sector as a whole, encumbered by public monopolies and restrictive regulations, has not progressed. The development of the sector has been constrained by the country’s focus on manufactured exports and the substantial barriers to investment in the sector. However, the Chinese government has been focusing more on the services sectors lately, particularly in sub-sectors such as finance, logistics, education, and healthcare, as it is also aiming to rank among the top exporters for transport, tourism and construction. The trade sector is particularly strong and includes online giants like Alibaba and JD.com.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 24.4 28.2 47.4
Value Added (in % of GDP) 7.3 39.9 52.8
Value Added (Annual % Change) 4.1 3.8 2.3

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
58,4/100
World Rank:
107
Regional Rank:
20


 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
5.99/10
World Rank:
55/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

Country Risk

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Sources of General Economic Information

Ministries
Ministry of Commerce
Ministry of Finance
Ministry of Foreign Affairs
Statistical Office
National Bureau of Statistics of China
Central Bank
Bank of China
Stock Exchange
Shenzen Stock Exchange
Economic Portals
Alibaba
 

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Latest Update: February 2024