News in Charts: China looks to new pillars of growth

The Chinese economy grew faster than expected in the first quarter of this year, according to official data. The National Bureau of Statistics of China said that GDP increased by 5.3% in 2024 Q1 compared to a year earlier – up from 5.2% in the previous quarter, and beating expectations in a Reuters poll of analysts of a 4.6% expansion. On a quarterly basis, the NBS said that the economy grew 1.6% in 2024 Q1, up from 1.2% in the previous quarter. A strong Q1 performance bodes well for the country being able to meet its annual growth target of “around 5%”. However, Fathom’s proprietary measure of China’s economic activity (our China Momentum Indicator 4.0) suggests that the true picture of the economy is likely to be less rosy than the official statistics show, with output growing at just 0.9% in 2024 Q1. And our forecast sees an ongoing moderation in growth over the coming years, as the economy continues to face structural headwinds: most notably its housing market bubble and weak domestic demand.

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To escape from this lacklustre future, China needs to transform its current model of growth. In the past, a major driver of China’s growth came from investment in the property sector, with the stock of outstanding real estate loans reaching a peak of $8.4 trillion in Q1 2022. With that old growth model losing steam, the most effective option would be a rebalancing of the economy towards the consumer. But with this approach unpopular amongst policymakers, China’s new strategy seems to be centred around maintaining a focus on investment, but shifting this investment to the manufacturing sector. While loans to the manufacturing sector are smaller in aggregate terms ($3.2 trillion in 2024 Q1, versus $7.4 trillion in real estate loans in the same period), loans to the real estate sector have been falling year on year since 2022 Q2. In contrast, loans to the manufacturing sector have increased substantially year on year since the beginning of 2020.

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China’s Made in China (MIC 2025) plan, first introduced in 2015, aims to move China up the value-add chain and help it to become self-sufficient in advanced high-tech sectors, including new energy. China’s dominance of supply chains for minerals and technology used in the transition to net zero has been well documented. One example is solar panels, with the IEA reporting China’s market share across all manufacturing stages (from polysilicon and wafers to cells and modules) at over 80%. As shown in the chart below, exports of lithium-ion batteries, electric vehicles and solar panels – all key products for the energy transition – have increased at a remarkable rate in recent years.

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Heightened geopolitical tensions have led countries to start rethinking their supply chains. China’s dominance across various parts of the green energy supply chain creates economic dependencies that concern the West. Additionally, with slowing domestic growth, there are concerns China may try to ease its industrial overcapacity problem by dumping cheap goods on international markets. Last month President Biden announced plans to raise tariffs on an array of Chinese imports related to the green transition, including hiking tariffs on Chinese electric vehicle imports from 25% to 100%. Meanwhile, the EU will soon announce the results of its anti-subsidy investigation into Chinese electric vehicles.

Until now, the US has been relatively isolated in imposing punitive measures on Chinese trade. Its gross trade intensity with China (when measured as a share of GDP) has declined in recent years. In contrast, the equivalent figure in allied countries has increased.

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Rising trade tensions with the US are starting to impact China’s vehicle exports to the country, which have declined since mid-2022. Facing tariffs in the US and a potential backlash in Europe, Chinese vehicle manufacturers are increasingly targeting other global markets. Russia became the largest destination for China’s vehicle exports in the year leading up to April 2024, with other significant markets including Mexico, Belgium, the UK and in more recent months Brazil.

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Mexico’s export market in particular highlights how emerging markets are already benefiting from the diversification of global supply chains amid rising geopolitical tensions. In 2023, Mexico surpassed China for the first time in 20 years to become the largest exporter of goods to the US. US imports from China totalled $427.2 billion in 2023, 20% below 2022 levels, while imports from Mexico were up 5% to $475.6 billion. A particular concern in Washington is that Chinese firms, facing high tariffs, might seek other routes into the US market either directly by setting up electric vehicle manufacturing plants in countries with free trade with the US, or indirectly by exporting electric vehicles to these countries. Mexico, with its access to the US market through the United States–Mexico–Canada Agreement (USMCA), is a key example.

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Overall, China’s strategy of focusing on high-tech exports will probably help to pick up some of the slack in its economy. However, structural headwinds and rising de-risking efforts by the West lead us to believe that China’s trend growth is still likely to head south in the coming years. Fathom will be presenting our latest outlook on China and the rest of the global economy in a series of client presentations over the coming weeks. LSEG clients will soon be able to access charts and analysis from Fathom’s Global Outlook, Summer 2024 in the Chartbook.

The views expressed in this article are the views of the author, not necessarily those of LSEG.

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