With China belatedly joining the rest of the world in reopening its borders, long queues began forming at China’s visa application centre in Singapore.
This indicates the pent-up demand of people here who want to revisit the country or business owners who want to rekindle business ties between the two markets.
This mutual attraction has grown over the years. Singapore is seen as the well-managed and stable financial hub of Southeast Asia, while China is seen as a vast market offering various business opportunities that cannot exist here.
In this post-pandemic world, China’s economy has undergone a more pronounced change: It is no longer a cheap manufacturing base but one where its 1.4 billion consumers are driving massive change in the make-up of China’s economy, where digitalisation and renewables are the new investment themes instead of traditional sectors such as manufacturing and property.
DBS analysts are unfazed by recent news that India’s population has overtaken China, resulting from years of its one-child policy. “Once the world’s production factory and now a global economic powerhouse, China’s digital economy has become a key pillar of its growth, with its sprawling population providing a captive audience,” says the bank in a recent report by the office of its chief investment officer.
“Rising income and wealth levels in China have created a new wave of consumers with both the urge and ability to spend, supporting the rise of China’s consumer discretionary sector, while the country’s growing ultra high net worth population provides opportunities in wealth management, providing a growth driver in China’s banking sector,” the bank adds.
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According to DBS, China has built on its existing industrial muscle into an economy with a network that facilitates “movement of its domestic production, massive labour force, and above all, knowledge and innovation”, creating a digital economy estimated by the China Academy of Information and Communications Technology as one that was worth US$7.1 trillion in 2021, equivalent to 40% of the country’s GDP.
This shift to become an “innovation powerhouse” is necessary because a declining labour force means it cannot rely on sheer numbers alone to sustain growth. Instead, “supportive policies, a cultural emphasis on education, and an innate ability to adapt should put it in good stead”. “The rise of its New Economy sector is a testament to this, as is China’s strength in emerging fields such as artificial intelligence, quantum computing, and biotechnology,” says DBS.
Thanks to higher income, China’s 1.4-billion-strong population is enjoying a much higher standard of living and conspicuous consumption — another growth driver that policymakers and businesses welcome. “Rising income and affluence have propelled China’s consumption engine to the next level, and today, the new-age consumers have not only an insatiable urge to spend but also the power to do so,” says DBS.
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Two promising sectors
As China’s economy transforms, two sectors stand out for investment firm Eastspring: Renewable energy and healthcare. With a 38% share in global renewable energy capacity in 2022 and forecast to rise to 42% by 2030, China is the current leader in this space, especially for solar and wind energy.
China has already stated a 2060 carbon neutrality target, creating opportunities for local companies throughout the solar value chain, ranging from producing polysilicon to wafers and photovoltaic modules. And given China’s scale and political will, it should attain market-leading positions in these two industries soon.
The International Energy Agency (IEA) estimates that China’s share of global polysilicon, ingot and wafer production will reach 95% by 2025. Within the wind energy sector, China’s wind turbine manufacturers are likely to tap on their low-cost advantages and create the tailwind not just for domestic generators but also export, says Eastspring.
Healthcare, the other sector favoured by Eastspring, is seen to ride on the ageing population trend. Healthcare expenditure as a percentage of GDP is expected to rise from 6.5% in 2022 to 7.5% in 2026. Within the sector, healthcare development projects can fuel growth for medical device players, with sales forecasted to increase from US$31.8 billion ($42.5 billion) in 2022 to US$45.4 billion in 2026.
“Moreover, the government’s push to enhance China’s self-sufficiency in pharmaceuticals will support domestic pharma companies and drive overall sector sales up from US$204 billion in 2022 to US$274 billion in 2026,” estimates Eastspring.
Political and geopolitical risks
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The optimism today belies a few difficult years when the economic fallout of the pandemic was made worse by tough policies enacted to cool overheating sectors, especially property and the internet economy. The chill was especially felt among the once-swaggering crop of private sector business executives, with the most famous of them all, Jack Ma, forced to stay out of sight. These policies were loosened only after their ripple effects hurt the real economy.
Andy Rothman, an investment strategist with Matthews Asia, acknowledges that there are some investors concerned that the government might again introduce policies that stymie growth.
“That was a problem in recent years, but I think this is a very low-probability risk now because Xi’s priority is to support a consumer-led economic recovery. The return to China of its most prominent entrepreneur, Alibaba founder Jack Ma, after a year outside the country, signals Xi’s understanding that he needs to create a better regulatory environment for the private companies that drive China’s economy,” says Rothman.
He adds that Xi is now focused on supporting a consumer-led recovery of the economy while cleaning up the consequences of past regulatory mistakes. It is one thing to clamp down on tech billionaires like Ma, but another when government policies undermine social stability and cause unease among the people.
The unemployment rate is relatively high at 5.3% and, more critically, 19.6% for youths between 16 and 24. That is why Rothman believes Xi will be “highly motivated” to keep his regulators from getting in the way of entrepreneurs who are critical in helping the economy achieve 5% GDP growth.
However, this 5% target has disappointed some observers, given the low base of 2021 and 2022. Rothman explains that 5% in real growth would generate an incremental expansion in China’s nominal GDP, which would be 25% greater than the expansion in pre-Covid 2019 when the real growth rate was 6%. For context, the potential net expansion for China’s economy this year would be roughly equal to the entire GDP of Mexico in 2021, he says.
In the first quarter of this year, before the full reopening, China grew its GDP by 4.5% y-o-y and 2.2% over the preceding 4Q2022. With such numbers, Rothman believes it is “very likely” the momentum will pick up further and drive fullyear growth to surpass the 5% target.
“Xi has directly addressed his policy mistakes of the past few years and explained how he will correct them. This self-awareness and remedial action lead me to believe that new economic policy mistakes are unlikely in the near future,” he adds.
Another key risk, which pre-dates the pandemic, is the ongoing tension between the US and China. Rothman, a former US diplomat, is not too worried. He cites an April 20 speech by US Treasury Secretary Janet Yellen, who laid down a more constructive approach to Beijing: “We seek a healthy economic relationship with China: one that fosters growth and innovation in both countries.”
Rothman expects political ties to remain stable but the risk of a full-blown crisis to be, at most, a medium-level risk. “Xi and Joe Biden are pragmatic and recognise that a further deterioration in relations would be detrimental to each of their economies, as well as their political prospects,” he says. “China opportunities outweigh risks for investors; China’s economy has clearly turned the corner.”
