Primary Drivers of the Chinese Economy

As of 2021, China has the second-largest economy in the world with a GDP of $17.7 trillion, behind the United States GDP of $22.9 trillion. If the economy were represented in purchasing power parity (PPP), China edges out America as the largest economy with a purchasing power of more than $27.3 trillion.

How did China go from a poor society, devastated by World War Two and its own civil war by the mid-20th century, to the number two economy today? After decades of economic stagnation and setbacks under Communist rule, China began to open itself to international trade and liberalize the economy when it established diplomatic and trade relations with the U.S. in 1979. As China's subsequent export growth fueled the growth of manufacturing and urbanization, China rose to be a major global economic power over the next four decades.

China has faced criticism about how its economy has been able to sustain an average annual growth of almost 10%, though this has slowed in the last few years, with a growth of 8.1% in 2021, still within China's growth targets. Namely, the government has been accused of manipulating the currency to keep Chinese exports attractive and of not disciplining companies that engage in intellectual property theft.

Industrial Growth

Like most countries looking to develop their economies, China’s first step was to build up its heavy industry. Today, China is the world's leader in manufacturing and produces almost half of the world’s steel.

China’s mining industry extracts coal, iron ore, salt, oil, gas, and gold. To reduce China’s dependence on coal, the country is moving towards more renewable resources and plans to increase its natural gas use in the coming years. China also has multiple oil reserves, as well as natural gas deposits that have yet to be fully explored.

The country is also a good candidate for hydroelectricity production, and in 2012, the Three Gorges Dam was completed and is now a major producer of electricity for the southern cities of China (including Shanghai).

Manufacturing Revenue

Most Americans know that China is a manufacturing powerhouse. Besides its large textile manufacturing sector, the economy also supplies machinery, cement, food processing, transportation devices (trains, planes, and automobiles), consumer goods, and electronics.

Not only does China have many domestic firms that create hardware and software, but the country is also a leading assembler of foreign electronics. The Chinese software and IT industry grew by 10.8% from May 2021 to May 2022, generating Q1 revenue of approximately $415 billion.

Similarly, China produces automobiles in factories owned by both domestic and foreign companies. However, most automobiles, domestic- and foreign-branded, are purchased by people in China, a country that had nearly 300 million vehicles in 2021. Chinese vehicle sales increased in 2021 by 3.8% to 26.2 million units.

The Chinese automobile industry is criticized for IP theft and for a bad safety record with cars produced by domestic firms. The majority of cars manufactured by Chinese companies are exported to Africa, South America, the Middle East, or Russia. Because of China’s unique distribution and sales methods, car dealerships and salespeople make a high margin on each vehicle sale.

Large Production Pharmaceuticals

The Chinese pharmaceutical industry is, like the rest of China, growing at a fast pace. China’s drug distribution system is multi-phased: drugs pass through various tiers and expensive middlepeople before arriving at hospitals and pharmacies. This industry is, again, plagued with criticisms of IP theft.

Domestic firms are the majority of the market but international companies like Pfizer (PFE), GlaxoSmithKline (GSK), Novartis (NVS), and AstraZeneca (AZN) also have a presence. With China reforming and regulating the pharmaceutical industry (increasing OTC access and enforcing patents), there is a high potential for investment growth in this area.

Chinese Consumerism

While once a country with rationing and consumer good shortages, after economic liberalization, China can be a consumer paradise for the few with means and a love for luxury goods. China is home to some of the largest shopping centers in the world, and, in addition to wholesaling, retail contributed $6.5 trillion to GDP.

Companies like Alibaba (BABA) have given a big boost to retail and e-commerce. Alibaba and JD.com's combined Singles Day 2021 sale saw a record-breaking $139 billion of sales in just one day.

Due to the impact of the COVID-19 pandemic n 2021, travel & tourism in China contributed only $14.2 billion to the Chinese GDP. Other services that are big in China include transportation, real estate, and construction.

China's Economic Concerns

While China’s growth seemed unstoppable at one point, there are obvious cracks in the economy that have slowed it down. First off, the country is under fire for the amount of non-renewable resources it burns through each year. With China already considered a large polluter and emitter of greenhouse gases, the expected increase in coal usage is troubling to some.

Next, China is home to rampant corruption. The national government is actively trying to stamp it out in an effort to make the country more business-friendly for Westerners and to avoid the economic and business inefficiencies that come from corruption.

Finally, there’s the problem of underemployment and inflation in China. Chinese farmers on small plots of land are marginally useful and, in an efficient market, would be unemployed. Although inflation in June 2022 was a manageable 2.5%, the last 20 years have seen the inflation rate vary wildly, a concern for businesses wanting to invest in the country.

The Bottom Line

China has the first or second-largest economy in the world depending on whether you’re looking at GDP or PPP. However, perhaps significantly, the country is not nearly as developed as other countries in the top 10. Government spending is a key driver of growth which has over the last few years led to indiscriminate construction. Even with the largest population on earth, China struggled to find buyers for real estate in its ghost towns. But the government's latest agenda focuses on stimulus to reinvigorate economic activity and if that happens the country has huge room to grow.