China: Innovate or stagnate?

The key to the success of China’s ongoing growth push will be how the country can lift productivity, says our Chief Economist, Greater China, Raymond Yeung.


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I spoke with Raymond and our China Desk Lead (currently seconding as Director, FIG Banks) Jessie Liu on podcast. Raymond said much of China’s productivity push would rely on its ability to innovate through research and development – a task he concedes will be “very difficult”.

“We know that the Chinese government is very, very eager to look at industrial policy as a growth driver.” - Raymond Yeung, Chief Economist, Greater China at ANZ.

“How we see China… lift productivity is a key issue to…how sustainable the China miracle can be,” he said.

“[Whether] China can extend this growth path over the next five or ten years down the road is highly dependent on whether China can lift its total factor productivity.”


In March, China unveiled a lower-than-expected 5 per cent growth target at the National People’s Congress, a stance labelled as ‘conservative’ given the rapid economic bounce back so far in 2023.

But Raymond said overcoming constraints could help China tame “some of the bottlenecks to improve productivity”.

“We know that the Chinese government is very, very eager to look at industrial policy as a growth driver,” he said – including a focus on artificial intelligence, manufacturing and automation.

Meanwhile Jessie said new energy technology would be at the forefront of this productivity shift, including investment in electric vehicle , battery technology and hydrogen.

“China has already put its hydrogen strategy into the 14th Five-Year Plan and is going to invest a lot into R&D around hydrogen production,” she said. Sinopec, China’s second-largest oil company, kicked off construction on the world's largest integrated green hydrogen project in February.

“Hopefully we can see some positives, especially on the technology side, to boost that productivity,” Liu said.

The COVID-19-led slowdown in China and subsequent reopening have already changed the conversation around China’s output, particularly around new energy elements.

They weren't in the conversation before the pandemic, certainly not in any sense of scale. The China opportunity, if we can call it that, actually has changed quite a lot.

Demographic roadblock?

Raymond said while the Chinese reopening had proved to be a fillip for the global economy, some “structural impediments” in the country remained.

“For example, the top one that has been always in our mind is demographics,” he said. “The population started to fall last year and actually the labour force has started to shrink a few years earlier as well.”

In Jessie’s view, as China’s population ages, opportunities to leverage the country’s aged-care and healthcare sectors are growing, particularly for Australian providers.

From Raymond’s perspective reviving the property sector is central to China’s fortunes.

“And property is a key pillar to the economy, both cyclically and also structurally,” he said. China faces a challenge of reviving its property sector amid its other challenges, Yeung said.

The return of Hong Kong

Raymond adds in the aftermath of COVID, China clearly sees the need for Hong Kong to “boost its status as an international financial centre”. He said the region’s new chief executive, John Lee, has been empowered to act on this front.

ANZ Research forecasts Hong Kong’s gross domestic product to rise to 3.2 per cent in 2023, after it contracted 3.5 per cent in 2022. A total of $HK350 million has been set aside for major events and tourism.

There is talk of businesses moving out of Hong Kong but there is a limit to other locations suitable for the kind of business done in the region.

Buying into global decarbonisation effort

A more enduring story, in Raymond’s view, is China’s role in global decarbonisation - but international cooperation will be critical.

Jessie agreed, noting a global “carbon strategy cannot work without China”. Working with the country on new energy technology like hydrogen is important, she said.

“China has to be engaged in this and play a very important role,” she said. “Because without China, the commercialisation and scale of the production [will be difficult and] very hard to bring the cost down.”

The experts also talked about the shifting trade dynamics between China and Australia and the growth of the renminbi as a popular trading currency.

Richard Yetsenga is Chief Economist of ANZ

This piece originally appeared in ANZ Insights published on April 4, 2023


The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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