China
China
Last updated: February 2023
China is the world’s second largest economy, behind the US, and outperforms its peers in emerging and developing Asia on indicators of per capita income, creditworthiness and business climate. Growth is broadly in line with the region.
| This chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2023 and 2027. Business climate is measured by the World Bank’s 2019 Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other regional countries. |
Economic outlook
Several months of widespread lockdowns, a downturn in the property market, weakening external demand and adverse weather conditions all weighed on China’s growth in 2022. The economy grew just 3% in 2022, down from 8.4% in 2021.
The IMF expects growth to accelerate to 5.2% in 2023 on the back of high domestic savings and pent-up demand as China abandons its zero-COVID policy; consumption could account for up to 80% of GDP growth in 2023. Strong domestic consumption and greater investment in infrastructure projects should help reduce unemployment, in particular youth unemployment which is above 16%. The outlook is set against a backdrop of ongoing weakness in the property market and high levels of corporate and state-owned enterprise debt. Supply-side constraints and mortgage strikes will continue to weigh on real estate activity. Demand for Chinese manufactured exports will weaken as global growth slows and consumption shifts towards services spending.
Risks are tilted to the downside. A further increase in energy prices and faster than expected tightening in global financial conditions would weigh on growth. Longer term, rising geopolitical tensions, particularly between the US and China, pose risks to external trade.
Growth will be slower in the coming decade than it has been in the past. This reflects a slowing working-age population, weaker investment and lower productivity growth, according to research by the RBA. China’s economy will also face the difficult task of rebalancing to achieve sustained growth over time. This includes the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and transitioning from a high to a low-carbon economy.
Alongside continued economic growth, per capita income will increase towards US$19,000 in 2027 according to IMF projections, up from around US$13,000 in 2022. The growing push into knowledge-intensive industries should pave the way for a rise in incomes over the longer term.
Country risk
Country risk in China is low. China has an investment grade sovereign credit rating from private ratings agencies and an OECD country credit grade of 2. This indicates a relatively low likelihood that it will be unable or unwilling to meet its external debt obligations. The elevated economy-wide debt burden, particularly among state-owned enterprises and corporates, remains a risk to China’s country ratings.
The risk of expropriation is elevated relative to China’s overall rating. According to the US investment climate statements, Chinese law prohibits expropriation of foreign invested firms, except under “special circumstances” where there is a national security or public interest need. Chinese law requires fair compensation for an expropriated foreign investment, but does not detail the method used to calculate the value of the foreign investment. Further, China’s many bilateral and multilateral free trade agreements, in general, cover topics like expropriation and investment arbitration mechanisms. The US is not aware of any cases of expropriation of US investments since 1979.
China’s political risk is on par with its overall rating. Political risk relates to the potential for further strain in geopolitical relations, including between China and the US and other countries, that adds to trade and growth risks.
China is ranked in the second bottom quartile for most dimensions of governance, according to Worldwide Governance indicators. This reflects in part weak rights for participation in the political process, uneven application of the rule of law and corruption. China scores in the lowest quartile for voice and accountability. Government effectiveness is ranked near the top quartile, in part reflecting the effectiveness of government policies in helping to contain leverage and credit risks while also preserving economic, financial and social stability.
Bilateral relations
China is Australia’s largest export and import partner. Total goods and services trade amounted to $282 billion in 2021, around 31% of Australia’s global trade portfolio. Resources—iron ores and concentrates, natural gas, coal, gold and copper—are Australia’s chief goods exports. Australian exports of agriculture to China (e.g. beef and wool) and services (e.g. tourism, aged care and education) are also significant. China’s rebalancing toward a more consumer-oriented economy and rising middle class should support demand for Australian agriculture and services exports moving forward. On the downside, disruptions in trade with China remains a notable risk to some Australian resources and agriculture exporters.
China is Australia’s largest source of tourist and student enrolments. Beijing’s announcement that degrees from foreign universities will no longer be recognised if they were undertaken online boosts Australia’s education, and broader service exports outlook, in 2023. The easing of China’s strict zero-COVID policy will also support stronger student enrolments and tourism arrivals. But the timing of the resurgence is uncertain. That’s because China is facing delays in processing passports and visas, flight prices remain high, many households have lost jobs and incomes during the pandemic and travellers remain concerned about catching COVID-19.
China is Australia’s eighth largest investor, owning a portfolio of $92 billion in 2021. In recent years, Chinese investment has broadened from mainly mining to sectors such as infrastructure, real estate, services and agriculture. The US ($1.1 trillion) and UK ($718 billion) remained the largest investors in Australia in 2021.
Australian investment stocks in China rose to $75 billion in 2021 from $65 billion in 2020. Businesses remain attracted to China’s growing economy and large domestic consumer market. Australia’s expertise in banking and wealth management services has seen financial institutions become some of the largest Australian investors in China.
