China is seeking to increase the share of consumption in GDP to more than half within the next decade in order to achieve a smooth transition in growth engines amid property sector adjustments and rising risks of slowing global trade, said a top economist.
Zhu Min, former deputy managing director of the International Monetary Fund and former deputy governor of the People's Bank of China, the country's central bank, warned that the share of world trade in GDP could drop due to the United States' potential tariffs.
Speaking at the 2024 US-China People's Dialogue in Beijing, Zhu said that the Chinese economy now faces challenges on both external and domestic fronts, ranging from low global economic growth and sluggish world trade to real estate oversupply and local government debt issues.
We were expecting (US president-elect) Donald Trump's trade policy in particular. Over the next few years, the share of global trade in (the world's) GDP will slow down. So, in three years we estimate it will fall by about 3 percent, Zhu said.
While it is too early to predict an accurate outcome, Zhu said that the potential tariffs would be bad for both sides and the world, as inflation has become a major political issue in the US while Chinese exporters would need to further diversify export destinations and strengthen cost management.
Equity markets in Asia and Europe dropped on Tuesday following Trump's threat to impose a 25 percent tariff on products from Mexico and Canada and an additional 10 percent tariff on goods from China.
To me, economically, a 60 percent tariff is not a real tariff — it's simply a way to force China to decouple from the US or to push the US to decouple from China, Zhu said, referring to an earlier rate mentioned by the former US leader.
Decoupling is the real risk. If trade is divided into two blocs, other things will follow — capital flows, for example, have already dropped to almost zero between the US and China. Technology transfers between the two countries are also almost zero today.
This will lead to more political issues and greater uncertainties. We must work hard to avoid this kind of situation and prevent a return to a Cold War-style divide.
On Monday, Chinese Premier Li Qiang called for opposing all forms of decoupling and firmly upholding stable and unimpeded global industrial and supply chains, while pledging to increase countercyclical adjustments to promote a sustained economic upturn.
It's a bumpy road ahead. That said, I think China is comfortable with the situation and well-prepared to handle it, Zhu said, stressing that China has identified three potential new growth engines to replace the three old ones — namely, infrastructure investment, real estate and exports.
Zhu said consumption will become the primary focus and the most important driver of growth, while the transition of manufacturing into high-value and digitalized sectors and the push toward carbon neutrality will also serve as key engines.
If China can increase the share of consumption in GDP from 48 percent to 58 percent in next 10 years, that would be a significant achievement. It's not easy, but the government is determined to make it happen, Zhu said.
He said the government is committed to ensuring that income growth is stronger than GDP growth rates, adding that more efforts are needed to open up the services sector to unleash consumption potential of services.
The services sector will become a major area for foreign investment, joint ventures and Chinese companies alike. Twenty-some years ago, everything was focused on manufacturing. Now, I think the services sector will be the next big opportunity.
Zhu added that China's recent stimulus package is working and further reforms and policies are needed, as he expects 2 trillion yuan ($276 billion) to be allocated in the coming years for local authorities' infrastructure investment and 2.5 trillion yuan from the monetary side to support the construction of unfinished real estate projects.