ETW 03: Is a 5.2% GDP Growth Rate for an 18 Trillion Dollar Economy Disappointing?
Covering Chinese chatters (discourses, narratives, policies and rhetoric) on external events and actors, military and security issues, and India.
Data on the Chinese Economy for the final quarter for 2023 has now been released, and the National Bureau of Statistics is in the process of now uploading a lot of interesting data for 2023. I’ll do a detailed breakdown of the rest of the data in the coming edition. In the meantime, those interested may read a breakdown of some of the stats in this SCMP report. In the meantime, I hope you enjoy reading my brief analysis below.
Econ Weekly: Is a 5.2% GDP growth rate for a $18 trillion economy disappointing?
By Amit Kumar
For an economy as big as China, i.e., a $ 17.6 trillion economy, a 5.2% y-o-y growth rate, shouldn’t be discouraging. So why do observers across the globe, including some within the country, continue to be concerned with the trend emerging out of China?
The answer to the question might lie in the following:
Firstly, China is still a country with a large population, which that means in per capita terms, its economy (~USD 12,000) is still behind many high-income and middle-income economies. Thus, for China to become an “advanced socialist country” as President Xi Jinping advocates, it needs to continue to grow at a stable rate of ~7 percentage points for a few decades. A cooling off of the economy at this stage might strengthen the concerns around the ‘middle-income trap’.
Secondly, various estimates by credit rating agencies and international institutions show that this trend of growth rate will continue to decline and will stabilise somewhere around ~4 percentage points.
Thirdly, China is an emerging economy and still has the potential to continue to grow at a higher rate. In fact, it would have sustained the momentum if not for the leadership’s conscious decision to rebalance its economy away from real estate and find new engines of growth. It was bound to decelerate the growth rate for some time. However, the belief was that the so-called new engines of growth would begin to replace the earlier ones. And the strategy might have paid off if not for the questionable foreign and economic policy choices. The securitisation of its national developmental strategy and belligerent foreign policy has spooked foreign businesses and governments alike. This has led to a sustained outflow of foreign capital, a stagnation in expansion plans of operating companies, and suspicion among new investors. The year 2023 proved to be the worst year in decades from the perspective of the net inflow of foreign funds into China. {FDI declined to 1.13 trillion yuan in 2023, an 8% drop compared to 2022]. The even greater scrutiny of domestic private businesses has meant that the private investment has not seen the kind of uptick the central leadership would have liked to see despite repeated assurances and encouragement. The mounting debt situation in the economy further restricts China’s Central Bank (People’s Bank of China) from adopting an easy money policy to stimulate growth in private investment.
Fourth, the above development has meant that the US and its allies and partners have chosen to strangulate China in one of the sectors it was hoping to drive its economic growth -Innovation and technology. Although the US might never be able to effect a broad-based decoupling on China, it has succeeded in provoking countries to think of de-risking as a plausible option with a greater focus on technology.
Fifth, the second engine of growth on which China is betting heavily, i.e. domestic consumption isn’t showing promise. This has been another area of concern for the Chinese leadership. Consumer confidence has not returned to pre-pandemic levels and on top of that, a growing unemployment rate (including the youth unemployment rate) coupled with an increasing dependency ratio does not inspire confidence. However, there exists an opportunity to significantly ramp up rural consumption.
Lastly, as the contribution of real estate and the allied sectors to the GDP further slows down (the property bubble hasn’t deflated completely), it seems unlikely that the new engines of growth can compensate for the deceleration in the economy in the near to intermediate future.
Tech Weekly: China’s Mature Nodes Fab Capacity Witness Aggressive Expansion
By Amit Kumar
Even as the US continues to tighten the stranglehold on China’s access to advanced nodes (less than 16 nm) semiconductor technology, Beijing’s mature node capacity (greater than 28 nm) is expanding at a significant rate.
According to a Tomshardware report, China currently operates 44 wafer fabs and 7 inactive ones. A forecast by TrendForce informs that among these, “25 are 300-mm fabs, 5 process 200-mm wafers, and 4 process 150-mm wafers.” Furthermore “By the end of 2024, companies like SMIC, HuaHong, Nexchip, CXMT, and Silan aim to add 10 more wafer fabs to this list, comprising nine 300-mm fabs and one 200-mm facility. There are 23 more fabs under construction, including 15 300-mm and 8 200-mm facilities, bringing the total new wafer fabs to 32, and all of them are expected to come online in the coming years.”
Of all the fab facilities operating and under construction, most are domestic but also have representation from foreign players including Samsung, TSMC, UMC, Global Foundries, Intel, and Texas Instruments.
In 2023, China’s import of ASML lithography tools saw a 1050% surge to keep up with its expansion plans, mostly driven by tools required for mature nodes. TrendForce forecast further stresses that China’s share in the mature processes will grow from the present 29% to 33% by 2027.
The mature nodes has applications in building chips for a wide range of consumer goods including automobiles, refrigerators, TVs, other consumer electronics, and Internet-of-Things. The TrendForce forecast warns that China’s rising capacity might lead to oversupply and trigger price wars, forcing some to go bankrupt.
Comment: The forecast itself may indicate a rising demand for analog chips made on mature node processes. Consumer electronics still have large markets beyond Europe, North America, and East Asia. These particularly include South Asia and some of the SEA countries. So, I am a little skeptical if an expanding capacity will lead to price wars. But what’s certain is that China is slated to retain its position as the second-largest manufacturer of mature node chips.
Also, in the next 3 years, China will see its share rise to 33%, while Taiwan, the world’s leading manufacturer of mature node chips, will witness its share decline from 49% (in 2023) to 42% in 2027. However, this segment of the supply chain is expected to remain sufficiently diversified (outside China) with players other than the US, Korea, Taiwan, and China, extending their share to 16% in 2027 from 12% currently.
Latest from the Indo-Pacific Studies Team:
In this latest podcast episode from Takshashila’s daily public podcast, ‘All Things Policy’, IPSP Research Analyst Bharat Sharma interviews Blake Berger, Associate Director at the Asia Society Policy Institute, on areas where the Quad and ASEAN can work together to meet emerging challenges in the Indo-Pacific region, particularly maritime security and private partnerships.
Eye on China is a weekly newsletter curated by the Indo-Pacific Studies Programme at The Takshashila Institution, a public policy think-tank based out of Bengaluru, India.
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