China’s Economic Crossroads: Navigating the Dragon’s Dilemma
As the world frets over US stagflation, China’s economy is busy playing a high-stakes game of weiqi, or Go, quietly encircling opportunities while Western bears shout “checkmate”. The narrative of inevitable stagnation overlooks one critical truth: dragons, even grounded ones, have a habit of reigniting their fire when least expected.
China’s property crisis, which once fuelled 25-30% of economic activity, has left local governments grappling with debt (90% tied to real estate) and households wary. Yet, as economist Keyu Jin noted in a recent FT interview, this is not Japan’s 1990s redux. Unlike Japan, China retains vast untapped potential: 500 million rural residents earn under $500 monthly, services make up just 50% of GDP versus 70%+ in many developed economies, and urbanisation-driven productivity gains remain incomplete. Beijing’s balancing act of managing a 300% debt-to-GDP ratio while deploying targeted measures like its property-sector liquidity package aims to douse systemic risks without fanning old flames.
Household consumption, at 38% of GDP, lags far behind Western levels, held back by low social mobility and patchy social safety nets, with pensions covering just 25% of rural workers. Yet US tech restrictions have inadvertently accelerated China’s R&D push, with annual patent filings exceeding two million. The shift to the “new productive forces” of green tech, EVs and advanced manufacturing has borne fruit: China now accounts for the vast majority of global EV sales and solar panel production.
With a shrinking workforce and ageing population, demographics pose long-term challenges, but near-term labour slack persists: 300 million rural migrants remain underemployed, and youth unemployment lingers. Meanwhile, trade with ASEAN and Global South nations now surpasses combined US-EU volumes, while “dual circulation” policies bolster domestic demand alongside Belt and Road partnerships.
The MSCI China trades at 10x forward earnings, which implies a 40% discount to historical averages with selective sectors like green tech and consumer staples such as Mengniu Dairy benefiting from premiumisation trends among 400 million middle-income earners.
The path ahead demands reforms: rebalancing toward consumption, managing debt without deflation, and navigating US containment. Yet, as Keyu Jin observes and as Huawei’s post-sanctions resurgence underscores, China’s resilience lies in its ability to “switch lanes” when blocked. China’s adaptability has defied doubters for decades. The path ahead may be uneven, but writing off a dragon mid-flight has rarely been wise.
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