The evolution of the Chinese economy affects us directly due to its size and the volume of raw materials, energy, and food for which it accounts. For example, the slowdown during 2022 has helped to reduce pressure on prices of raw materials.

Specifically, the country’s growth was 3% per year, below the government’s target (5.5%), and the worst figure since 1976 (if 2020 is not taken considered). The country’s activity has been restrained by the zero-tolerance COVID policy and the wave of contagions at the end of the year, something that will probably be solved as the months go by. However, there are structural factors that have characterised China’s evolution over the past year, all of which have no easy solution.

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In recent decades, the Chinese model has had two driving forces that have led it to become the world’s second largest economy, lifting 800 million people out of poverty. On the one hand, there is the investment in infrastructures and fixed assets, which has materialised in giant cities, and transport and telecommunications networks, among others. On the other hand, there are exports of low value-added manufactured merchandise that reached almost every corner of the world. Both propellers were sustained by a constant flow of cheap labour migrating from the countryside to the cities. However, the wage restraint of this said force is counterbalanced by low household consumption, which accounted for 54% of the GDP in 2021, compared to 64% in South Korea, 70% in India, 71% in Germany, and 82% in the US.

The government has been announcing the need to change this model for more than a decade. In fact, in Hu Jintao’s time, the search for a ‘Harmonious Society’ and ‘Scientific Development’ was already announced, intended to boost consumption and reduce inequality while at the same time encouraging high value-added sectors. Given the low share of consumption in GDP, it is necessary for consumption to grow more than investment in order to achieve the coveted rebalancing, something that was achieved only sparsely between 2010 and 2019. 

However, the main driver of growth in 2022 was investment (1.5%), ahead of consumption (1%) and exports (0.5%). This reverses the pre-pandemic trend, in which consumption was the fastest growing component and gradually made consumption the largest contributor to the GDP. As a consequence of the slowdown in Chinese household spending, the services sector decreased its share of GDP (52.8%), while the primary (7.3%) and secondary (39.9%) sectors increased their weight. In addition, inequality also would have increased in 2022, a factor that restrains consumption. 

Another structural problem is the deterioration of the real-estate sector, provided that investment has diminished by 10%, housing sales by 24% (by area) and prices have been falling for 16 consecutive months. Companies in the sector, such as Evergrande, are in the process of restructuring, given that the government wants to avoid a domino-effect bankruptcy that would expose banks and other related companies. Although the authorities have tried to contain the growing debt of real estate companies through the famous three red lines, they have finally backed down due to the rapid deterioration of the sector. Notwithstanding, this may not be enough to revive a key area of the country’s economy, which directly and indirectly accounts for close to 25% of the GDP.

In this vein, the government’s priority is to finalise the housing projects that have already been approved, as thousands of citizens with mortgages took to the streets last year to protest against the possibility of not being given their homes. This is a major source of social unrest, so the government is endeavouring to get to the root of the problem.

Linked to the growth model and the real estate sector also is the demographic issue. China’s population has declined for the first time since the 1960s. China had 1.41 billion inhabitants at the end of 2022— 850,000 fewer than at the end of 2021. In the same vein, the pace of urbanisation likewise has slowed. It remains to be seen whether the pandemic is the cause or perhaps something more structural, since around 60% of China’s population already resides in urban areas.



In any case, population decline is taking a toll on the classic drivers of China’s GDP. This is due to the fact that the momentum of infrastructure and real-estate investment was sustained by growing urbanisation, provided that internal migration provided an almost infinite flow of labour to grow industry, exports, and cities. Given the potential shortage of workers, it is more important than ever to boost the technology and high value-added sectors. However, the US wants to halt China’s rise as a technological superpower, which will stand as a major obstacle.

Against this backdrop, 2023 will be a key year for the Asian country. The conjunctural factors arising from COVID will be resolved quickly, which thereby will boost activity. However, this will not be enough to change the long-term trend of slowing growth. Therefore, structural problems must be corrected, which requires boosting domestic consumption and high value-added sectors in addition to tackling the problem of inequality. At the same time, there is an urgent necessity to reduce the weight of investment in infrastructure and real estate. These changes will have an impact beyond China, since they will shape the future of the global economy.