China’s economy looks like a mess — but some sectors are quietly doing well in a ‘two-speed economy’

• China’s economy is struggling: GDP is at a 30-year low, the birth rate is low and unemployment is rising.

• Despite this, sectors such as the eco-industry and tourism are thriving.

• However, the healthy sectors cannot outweigh the burden of the sick sectors.

China’s economy is looking very bad right now.

The country’s GDP growth has hit a 30-year low, the birth rate continues to fall, and youth unemployment is at alarming levels. Meanwhile, financial markets are bleeding, the property market has gone up in smoke, local government debt seems alarming, and foreign investors are leaving in droves.

Despite these challenges, the world’s second-largest economy is not completely imploding — some sectors are still thriving.

“Spending on tourist catering and other services is decent, but caution is needed when making larger purchases, especially in real estate,” Rory Green, chief China economist at GlobalData TS Lombard, told Business Insider.

“The continued bad news from the real estate sector has overshadowed more resilient sectors of the economy,” analysts at asset manager AllianceBernstein wrote in January.

However, they added that “as the economy grew by almost 5% despite the housing sector’s problems, other industries are clearly growing at a much faster pace.”

“What we see in the Chinese economy is really a dual-speed economy,” John Lin, chief investment officer of China Equities at AllianceBernstein, told Bloomberg TV in January.

He added that the real estate sector, which made up a huge part of the Chinese economy, had been hit hard.

But Lin added that “outside of real estate, whether it’s parts of the consumer sector or particularly industrial manufacturing, some companies are actually doing quite well.”

Green and niche industries are thriving

Even before the COVID-19 pandemic struck, Beijing knew China’s economy needed to reposition itself beyond being the world’s low-cost industrial hub, as companies were already fleeing it.

There are many reasons for the departures, including former U.S. President Donald Trump’s trade war, rising wages and companies’ increasing desire to diversify their supply chains.

To move up the value chain, Beijing is now focusing on higher-value manufacturing. Industries focused on sustainability are key areas of focus for Beijing.

China, in particular, is promoting what it calls the “three new” industries: electric vehicles, lithium-ion batteries and solar cells, to drive the economy.

Louise Loo, chief economist at Oxford Economics, wrote in a note earlier this month that these new, booming industries are set to replace the “three old” pillars of China’s economy: furniture, clothing and household appliances.

They are already doing well.

Thanks to government subsidies, China is already the largest market in the world and producer electric vehicles. EVs made in China are now being exported to Europe and beyond. They are also poised to enter the U.S. market, BI reported in May.

China is also a leading producer of lithium iron phosphate batteries, which power many electric cars. This has allowed China’s two largest battery companies— BYD and CATL — control about half of the world market.

When it comes to solar panels, China is pushing for energy transformation plans stimulated intensive investment. Mackenzie Wooda raw materials research and consulting firm, predicts that by 2026, China will dominate the global market with an 80% share of solar energy production.

AllianceBerstein’s Lin said other niche industries were also doing well, citing exports of buses and forklifts from the heavy industry sector as examples.

China reported a 17% increase in industrial profits in December compared with a year earlier. Interestingly, profits in the rail, shipping and aviation industries rose 20%, according to official data.

Travel has picked up pace after years of pandemic lockdowns

Services are another pillar of China’s economy that Beijing is trying to develop.

Economic uncertainty has hit consumer wallets. Still, travel has picked up, particularly in China, after years of pandemic lockdowns.

This year, Chinese travelers made 474 million domestic trips during the week-long Lunar New Year holiday in February, spending 633 billion Chinese yuan, or $88 billion, on travel-related expenses such as hotels, sightseeing and food — exceeding pre-pandemic levels.

While authorities did not provide a breakdown of individual trips, Reuters calculations showed average spending per trip fell almost 10% this year compared with 2019.

Despite all this, economists at Nomura said spending this holiday season is encouraging.

“The question is whether the data will be enough to stem the stock market slump, or whether China will need to take more decisive action to support the market,” Nomura economists wrote in a note this month.

China still needs time to fuel new industries to replace the real estate sector

China’s current economic prospects are not the best.

“We continue to see a slowdown in consumption in 2024 as income, confidence and negative wealth effects weigh on households, while base effects and deferred demand prove less supportive,” said Green of GlobalData TS Lombard. He predicts retail sales will fall 4% to 5% this year from a year ago.

This is partly because new industries have not yet been able to replace the real estate market.

With the real estate market accounting for a quarter of China’s GDP and more than two-thirds of household wealth, its overall burden on the Chinese economy is much greater than what it is coping with now.

By comparison, the “three new” sectors and their related mining sectors accounted for 11% of China’s GDP in 2023.

“So the positive impact of rapid growth in new industries is unlikely to make up for this difference, at least in the next two years,” Oxford Economics’ Loo wrote in a report, comparing China’s new growth drivers with the real estate sector.

“We see this as a real transformation — a transformation from a historical, leveraged growth model to one that more closely resembles the rest of East Asian economies today,” Lin said, citing Taiwan and South Korea, which have undergone similar “painful” transformations from lower- to upper-end manufacturing economies.

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