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At China’s Belt and Road Forum last week, where Beijing marked the 10th anniversary of its lavish $1tn infrastructure programme, foreign leaders and executives were repeatedly invited to participate in China’s “high-quality development”.
One of President Xi Jinping’s favourite slogans, the term is vaguely defined. But few sectors probably encapsulate its underlying ambition better than China’s green technology industries, particularly its electric-vehicle makers. Not only has China become an EV leader with its own brands and advanced technology, it is also rapidly increasing its exports.
But while few could argue with the pursuit of high-quality industry, the broader question for Beijing is whether prioritising these sectors at this moment is the right answer for China’s more immediate malaise — slowing economic growth driven by a deep and sustained real estate slump.
Central to this question is whether new sectors such as EVs can generate as much employment and economic growth as the once-mighty property sector.
At its height three years ago, before a government crackdown on debt led to defaults among developers, real estate accounted for about 30 per cent of China’s economy, dwarfing EV production’s low-single digit share.
But in a new report, Goldman Sachs analysts Maggie Wei and Xinquan Chen argue that each renminbi of “final demand” in “new energy vehicle” production generated only marginally less domestic value-added for the economy compared with the residential housing construction sector.
Grouping EV production with battery production for other uses, as well as investment in wind and solar power generation, these “New Three” industries over time could partly offset the long-term decline in real estate. But even as they grew bigger, there would still be an average net negative 0.5 percentage point drag from the property sector’s decline on China’s gross domestic product growth over the five years until 2027, the report said.
This would tail off in 2027, by which stage EV production would have risen from 6.7mn units last year to about 18mn units. They would account for about 60 per cent of total passenger car production in China by then, from about 29 per cent in 2022.
Much would depend on the willingness of Chinese consumers to spend. In a low-growth scenario, production growth would rise 2 per cent a year, mostly driven by exports. In a higher-growth situation, Chinese consumers would replace their existing combustible engine car with more than one EV.
But complicating the prospects for higher consumption is that the new greener industries also produce fewer jobs. The Goldman analysis pointed to 3mn net urban jobs losses next year for the property, internal combustion engine vehicle and “New Three” sectors combined. Growth in the “New Three” sectors would offset about half of the 6mn job losses in the property and internal combustion engine vehicle industries.
Herein lies the challenge for Beijing. While the government fetes advanced industry as the future, particularly at a moment when it is facing geopolitical challenges from the US, these sectors generally do not employ as many people.
Meanwhile, families had about 80 per cent of their wealth in property prior to the downturn. They are watching this deflate, with house prices falling again in September despite incremental government support measures. “It is too early to call the bottom for the property sector,” says Nomura chief China economist Ting Lu.
Until the government can find a way to restore confidence among homeowners, as well as among businesspeople and entrepreneurs, the economy will continue to struggle. Worse still, from the government’s perspective, there will be fewer people willing to buy the shiny products pouring out of China’s new high-quality industries at a time when developed countries are shutting the doors.
Many economists argue that Beijing not only has to stabilise the property market if it really wants to get people to feel secure enough to unlock their savings and begin spending again. It also needs to implement deeper reforms, such as providing better social welfare and access to quality healthcare.
To be sure, such structural reforms are difficult. But doing so might finally bring about what the state-run media calls “high-quality consumption”.
joseph.leahy@ft.com
Source: Economy - ft.com
