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China will finish strong in 2023, but will face difficult challenges in 2024

China’s economy, the second largest in the world, will most likely wrap up 2023 with Beijing’s expected “about 5%” target. However, overcapacity in the electric vehicle and other sectors, the ailing property market and mounting local government debts are likely to compromise economic recovery efforts and cloud China’s prospects in 2024.

According to the International Monetary Fund (IMF), the World Bank (WB) and other institutions, China’s growth forecast for 2024 may reach 4.4% or lower.

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Thanks to a slew of supportive measures to stem downturn risks since July, China’s economy rebounded modestly in the third quarter of 2023, rising by 1.3% from the previous three months and gaining 4.9% year on year.

However, business confidence and property investments have remained weak, while concerns over the sustainability of the recovery remain.

Experts fear that risks will intensify next year and the troubles facing the property sector will not disappear.

China’s regional banks have relatively high exposure to local government financing vehicles (LGFVs) – the off-budget platforms set up by regional authorities to carry out infrastructure spending as well as investments.

Beijing is facing a “monumental” challenge to unwind China’s local government debt crisis, according to rating agency Standard & Poor’s.

They estimated that local government financing vehicles – created to aid off-budget financing, especially for infrastructure spending – collectively owe about RMB 60 trillion (US$8.2 trillion) in debt.

China’s electric vehicle and battery-making industry, which saw carmakers and local governments launch new projects, could lead to new overcapacity issues. Over the past decade, as many as 500 electric vehicle start-ups were created in China, but just 200 carmakers are certified by the government for mass production.

Consumption contributed to almost 95 per cent of China’s gross domestic product in the third quarter of 2023. However, Yu Chunhai, a deputy dean at Renmin University of China’s School of Economics, doubted if the boost to the economy would be sustainable going into 2024.

Last October, the IMF cut its growth forecasts for China and expressed concerns about risks related to China's property crisis, volatile commodity prices, geopolitical fragmentation, and a resurgence in inflation.

The World Bank (WB) revised up China's economic growth forecast for next year to 4.4%, from its previous projection of 4.8%, citing a loss of confidence partly due to falling property prices.

The gross domestic product (GDP) growth expectation for the world's second-biggest economy was left unchanged at 5.1% for this year, faster than the 3% recorded last year.

"China is seeking new drivers of growth based on consumption and innovation that would avoid the problems inherent in the old model of growth, but the transition is proving difficult," said the WB’s report.

"Some policy choices and changes have exacerbated uncertainty for consumers and investors. Loss of confidence, attributable in part to falling property prices, increased indebtedness, and the implications of aging, has led to a further increase in the already-high savings rate to 33%," it added.

The World Bank, in addition, revised down the GDP growth forecast for East Asia and Pacific region to 5%, from 5.1%, for this year; and to 4.5%, from 4.8%, for 2024.

China’s economic growth in 2023 remains uneven due to the ongoing property downturn, the possibility of disinflation, record high unemployment rates among young adults, and declining exports. These factors are causing concern among policymakers, and there is mounting pressure on them to implement new stimulus measures.

Central bank interest rate cuts and further easing of property controls are being considered as potential measures to address the economic challenges.

For China, the bounce back from the reopening of the economy following three years of strict zero-COVID policies has faded, and elevated debt and weakness in its property sector are weighing on growth, according to the WB.

Initial signs of improvement had emerged in August, with factory production and retail sales growth accelerating while declines of exports and imports narrowed and deflationary pressures eased. Profits at industrial firms posted a surprise 17.2% jump in August, reversing July's 6.7% decline.

Analysts say more policy support will be needed to ensure that China's economy can hit the government's growth target of about 5% this year.

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Softer global demand is taking its toll as well. Goods exports are down more than 20% in Indonesia and Malaysia, and more than 10% in China and Vietnam compared with the second quarter of 2022. Rising household, corporate and government debt has further dented growth prospects.

The worsening forecasts also reflect that much of the region — not just China — is starting to be hit by new US industrial and trade policies under the Inflation Reduction Act and the Chips and Science Act.

Laws and Regulations in 2023

Multiple new laws and regulations that affect doing business in China came into force on January 1, 2023. Foreign investors and businesses engaging in food and beverage, import and export, new energy vehicles, sports, and financial activities were affected by these changes.

Among the regulatory changes are:

  1. Catalogue of Encouraged Industries for Foreign Investment (2022 Version), which lists the industries where foreign direct investment (FDI) is encouraged and that benefit from favorable policies in China. The new catalogue contains a total of 1,474 items (519 in the national catalogue and 955 in the regional catalogue), an increase of 19% from 1,235 items in the 2020 version. These align with China’s plans to attract foreign investment into high-tech manufacturing and production-oriented service industries, as well as green development, healthcare, elder care, sports, vocational education, and rural revitalization.

  2. 2023 Tariff Adjustment Plan. 1,020 commodities were subject to provisional import tariff rates lower than the tariffs of the most favored (MFN) nation, including anti-COVID medications. Other commodities’ import and export tariffs were increased to support the growth of domestic industry and address shifts in supply and demand. Last July, the eighth stage of the MFN duty rate reduction on 62 items related to information technology (IT) was implemented, reducing China’s total tariff level.

  3. Measures for Data Security Management in the Field of Industry and Information Technology (Trial Implementation). This represents a new guideline that clarifies how businesses should manage sensitive industrial and telecommunications data in line with the requirements of the Data Security Law. The Trial Measures divide data into three categories and demand that businesses use various levels of security precautions while gathering, processing, transmitting, and discarding data.

  4. Exemption of Vehicle Purchase Tax on New Energy Vehicles. This subsidy extension showed that the government wants to support the industry and expand this critical market, as well as develop the overall industry.

  5. Interim Measures for the List-based Management of High-end and Urgently Needed Talents Eligible for the Preferential Individual Income Tax Policy in the Hainan Free Trade Port. This program was specifically designed for foreign high-end talent and talent in short supply and is applicable to investors and business owners in selected sectors.

  6. Law on the Protection of Women’s Rights and Interests (Revision 2022). The amended law added nearly 30 new provisions to enhance women’s protection in areas ranging from gender equality in recruitment and contract negotiation, employer’s obligations in preventing sexual harassment, as well as relief measures for women should their rights and interests being breached. While Chinese law specifically forbids sexual harassment in the workplace, the revised law further defines sexual harassment in the form of verbal remarks, written language, images, physical behavior, or other actions that are against the will of women.

  7. Provisions of the Supreme People’s Court on Several Issues Relating to the Jurisdiction over Foreign-related Civil and Commercial Cases. This regulation aims to protect the rights of parties involved in litigations, both domestically and internationally, making the process more convenient, and enhancing the standards and effectiveness of trials for international civil and commercial disputes. It also promotes compatibility between different regulations that are in place, especially when dealing with foreign-related cases.

  8. General Financial Accounting System. The new system improves the financial management function of general accounting on an accrual basis while consolidating the budget management function of general accounting with a cash basis as its foundation, allowing for a more thorough and accurate reflection of the government’s financial standing. The accounting industry benefits from these new arrangements in (at least) four ways: by advancing the unification of the government accounting standard system, by adjusting to the requirements of the reform of consolidated financial reports for the government, by meeting the needs of integrated budget management, and by further classifying asset and liability accounts.

  9. Agricultural Product Quality and Safety Law (Revision 2022). This legislation is important for companies operating in the food and beverage sector. The law states that when food companies buy agricultural goods as food components, they must verify certificates and qualifications. It also specifies the obligations of online platform operators that sell such products, and of people involved in supply chain logistics.

  10. Measures for the Standard Contract for Outbound Cross-Border Transfer of Personal Information, effective since June 2023. The Measures provide guidance and procedures for the adoption of Standard Contractual Clauses (SCC) to allow for cross-border transfers of personal information.

China’s three most concrete and impactful regulations on algorithms and AI (artificial intelligence) are its 2021 regulation on recommendation algorithms, the 2022 rules for deep synthesis (synthetically generated content), and the 2023 draft rules on generative AI. Information control is a central goal of all three measures, but they also contain many other notable provisions.

The rules for recommendation algorithms bar excessive price discrimination and protect the rights of workers subject to algorithmic scheduling. The deep synthesis regulation requires conspicuous labels be placed on synthetically generated content. And the draft generative AI regulation requires both the training data and model outputs to be “true and accurate,” a potentially insurmountable hurdle for AI chatbots to clear.

All three regulations require developers to make a filing to China’s algorithm registry, a newly built government repository that gathers information on how algorithms are trained, as well as requiring them to pass a security self-assessment.

Financial Industry

In March 2023, Beijing released an official plan to reform and restructure the country’s financial regulatory framework. A central commission for finance was established as the Central Committee’s own decision-making institution — designing, coordinating, and overseeing the country’s efforts to achieve financial stability and development. It replaced the State Council’s Financial Stability and Development Committee. This is Beijing’s way of enhancing its authority over a financial sector that has become a source of turbulence in recent years.

A new national regulatory body, the National Bureau of Financial Regulation, was also set up to oversee consumer rights protection and regulation of the financial industry except for the securities industry. The China Banking and Insurance Regulatory Commission was abolished and the PBOC (China’s Central Bank) focused on monetary policy and macroprudential regulation.

The 2023 plan also seeks to optimize the central bank’s structure. All the regional branches, which operate across multiple provinces, will be removed. Instead, there will be one provincial-level branch in each of the 31 provinces and five separate branches in the cities of Shenzhen, Dalian, Ningbo, Qingdao and Xiamen. It will be a better central–local structure for monetary policy implementation and macroprudential regulation.

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The reform of the local financial regulatory framework arises from a deep concern over the scale of local government debt. In 2022, the Chinese local government’s debt reached RMB 35 trillion (US$4.8 trillion) and the local government financial vehicle (LGFV) debt was close to RMB 60 trillion (US$8.3 trillion).

The 2023 round of financial reform comes at an extraordinary time for the Chinese economy. The external environment is uncertain again, due to the pressure of high inflation and tightening monetary policy in developed economies. Domestically, slow growth, accumulating systemic risk and the shrinking policy room are the biggest challenges.

Given the uncertain economic outlook, it is increasingly critical that the plan for reforming the financial regulatory framework will be implemented seriously. The National Bureau of Financial Regulation, officially opened in May, is key to this plan.

Trends in China

The trends in China are shifting, some for the better. With recent regulatory changes and the country’s economic profile, there are 4 key trends that could benefit business growth in China.

Since fully reopening after almost three years of strict anti-COVID measures, Chinese consumers confidence increased significantly, and their spending habits changed.

Digitalization: Blending the boundaries between real and virtual worlds.

This trend is one of the most significant ones in China. The country is one of the world leaders in digitization. And social media is one of its most powerful drivers. Social media marketing is vital for businesses seeking to expand into the Chinese market. Platforms like Red (Xiaohongshu) are viral among young Chinese netizens.

Platforms like Taobao and Douyin break the boundaries between entertainment and e-commerce. In fact, of the many Chinese internet users, 68.2% watch live streams. That’s roughly 700 million potential Chinese consumers.

Companies will also leverage VR and AR technologies to differentiate themselves and capture more viewers. For instance, Dewu (an e-commerce application) created the most extensive AR shoe model library. It allows users to try any model and feel its size and details by relying on the technology. It’s become increasingly popular, especially among Chinese millennials and Gen-Z. And dominating these two generations is a vital trend in China.

The rise of Web3

Despite the 2022 crypto collapse, blockchain technologies continue to attract and give rise to new products. Tech giants such as Alipay and Tencent have launched their own NFT (Non-Fungible-Token). Even the state-owned companies Mango TV and Xinhua News Agency are launching their NFTs. In fact, demand is so strong that the Business Wire reports that the industry is expected to reach US$48 billion by 2028.

Gen-Z: The future generation

Gen-Z is undeniably the economic force of the future, and they will be the top consumers of the nation. Those born after 1995 account for more than 260 million individuals and will make up almost 30% of the population by 2025. Furthermore, they are willing to spend more than previous generations, almost accounting for 40% of consumption.

The top trend in China is the growth of the Gen-Z generation. This trend is the most lucrative. According to Tencent, this segment makes up an astonishing 50% of luxury goods consumers.

Also known as digital natives, they are tech-savvy and highly individualistic, with a powerful desire for self-expression. According to survey data, 50% of Gen Zs have a passion for the latest and newest experience. They put a premium on brands that align with their values.

Gen-Z’s purchasing habits are (to some extent) influenced by peer pressure and social validation. They love user-generated content, reviews, and other online and offline feedback mechanisms.

A buyer’s market

While not substantial, this trend in China remains important. Unlike the previous generation, modern consumers have become more careful buyers. With the availability of online information, they will take the time to thoroughly research a product before buying it. They will compare its quality and price and seek to compare different platforms and their pricing policy.

Despite being known (and for good reason) for their saving habits, Chinese consumers are willing to spend more on premium products. With that in mind, crafting a marketing strategy that aligns with this market reality is paramount.

The metaverse: China edition

Over the past year, the metaverse has become increasingly substantial in China, with more brands testing the waters and expanding into this segment. The metaverse can be explained as a virtual world that allows for greater integration of the digital and physical, in areas ranging from socialization and shopping to work. Technologies include those within the fields of virtual and augmented reality.

The metaverse presents new opportunities for brands, businesses, and developers, as shown by the over 16,000 metaverse-related trademark applications from Chinese companies. Many of the big tech companies in China, including Alibaba, Baidu, Tencent and ByteDance, have released their own metaverse ecosystems, wherein users can create avatars and interact in a virtual environment.

Compared to countries such as the US and the UK, Chinese consumers are showing greater interest in the metaverse, especially as it relates to gaming. In fact, among Chinese consumers who are interested in the metaverse, over 82% are optimistic about its future benefits, which is much more than among those in Western countries.

Virtual influencers: The new celebrities

AI-generated virtual influencers are amassing huge numbers of followers and becoming celebrities in China, with the industry expected to increase from US$870 million in 2021 to US$6.7 billion in 2025. This comes at a time when China is cracking down on human celebrities and influencers, with virtual influencers becoming safer, scandal free alternatives.

Technological advances have allowed these virtual influencers to hold live streams, walk down virtual runways and pose alongside products, just as a real influencer can. Especially among fashion brands, working with virtual influencers in China has become increasingly common.

The pet industry

Over the past ten years, the pet industry in China has seen a 2,000% growth rate. Chinese pet owners are increasingly treating their furry companions as beloved family members and are more willing to spend on them. The younger generations are moving away from the traditional family unit, with many preferring to live alone and looking to pets to fulfil their emotional needs.

As a result, all categories within the pet market are seeing surges, from pet food and pet toys to pet tech devices and clothing. The entire pet industry is expected to reach US$113.9 billion in 2025. With over 76% of pet owners in China under the age of 30, online purchase channels are at the forefront of the pet market.

Healthy, premium, and natural pet foods and treats are hugely popular among pet owners, who are mostly young, highly educated consumers living in higher-tier cities. These consumers are not only interested in their own health but also the health of their animal companions. Other trends include pet tech devices such as automated feeders, smart cameras, or smart litter boxes.

Adventure and the outdoors

Another trend that has surged over the past year is a fascination with the outdoors. From skiing to camping, Chinese consumers are more willing than ever to try out new hobbies and activities, especially after the end of COVID restrictions.

The Winter Olympics in Beijing helped to drive interest in winter sports, leading to a growth in sales of winter sports equipment among consumers. Moreover, the popularity of Team China’s Eileen Gu, who won the gold medal in the Freeski Big Air event among others, has also added to the excitement and hype around winter sports.

Aside from winter sports, Chinese consumers are also showing greater interest in hiking and camping as summertime activities, a market expected to increase to above US$100 billion by 2025.


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