Bracing for the China transition

THE Chinese economy re-accelerated to 5.4% year-on-year (y-o-y) in 4Q24, up from 4.6% y-o-y in 3Q. Breaking down the data, retail sales growth and industrial production growth improved to 3.8% y-o-y and 5.7% y-o-y, respectively, compared to 2.7% y-o-y and 5% y-o-y in the previous quarter.

Overall, the economy demonstrated a robust V-shaped recovery in the final quarter of the year, reflecting the effectiveness of stimulus measures introduced in late September. As a result, the Chinese economy grew by 5% in 2024, achieving its growth target of around 5%.

Despite positive headline data, the underlying details show that China’s resilient growth in 2024 was primarily driven by strong external demand, with net exports contributing over 30% to GDP growth – the highest since 1997. At the same time, retail sales as a percentage of GDP fell further to 36.17%, reflecting persistently weak domestic demand. This sluggish domestic consumption has fuelled debates about whether China can escape the middle-income trap, especially after its GDP per capita stagnated around US$12,600 from 2021 to 2023.

The good news is that China’s nominal economic size reached a record 134.9 trillion yuan in 2024. Based on the exchange rates in 2024, this translates to a GDP just under US$19 trillion, with GDP per capita approaching US$13,500.

This marks a significant milestone, ending a three-year stagnation of GDP per capita and suggesting that China may have the chance to escape the middle-income trap with the help of industrial upgrade and technology advancements even the domestic demand remains sluggish.

China’s efforts in industrial upgrades are bearing fruit. The added value of high-tech manufacturing and equipment manufacturing accounted for 16.3% and 34.6% of total industrial output in 2024, reflecting increases of 0.6 and one percentage point compared to the previous year. These gains underscore the success of China’s focus on modernising its industrial structure.

This month’s highlights include China’s sixth-generation fighter jet, Xiaohongshu, and DeepSeek, which have captured global attention. China’s industrial foundation, deeply rooted in manufacturing, has long emphasised cost efficiency and low resource consumption, key pillars of the country’s rise as a global manufacturing powerhouse.

In this context, DeepSeek’s cost-efficiency aligns with China’s broader development strategy, making its breakthroughs less surprising.

That said, after trying five to six large language models in recent months, I found DeepSeek quite impressive from user perspective.

In addition to the cost efficiency, these achievements highlight the fruitful returns of China’s sustained tech investments, showcasing its ability to remain competitive despite significant challenges, including the property market turmoil and disinflationary pressures.

These developments reinforce confidence that China is well-positioned to escape the middle-income trap these two years, even amid sluggish domestic demand.

Looking ahead, if the yuan withstands the pressures of Trade War 2.0, GDP per capita could rise further to US$15,000 by 2026, lifting China to the high-income group.

China’s potential transition from a middle-income to high-income economy could bring significant opportunities for Asean. First, as China upgrades its industries and climbs further up the value chain, it will likely export more advanced products.

At the same time, a wealthier Chinese consumer base will drive demand for higher-quality agricultural goods, consumer products, and services such as tourism, healthcare, and education from Asean.

This shift offers Asean economies the chance to expand their market presence and diversify export portfolios, enhancing resilience to external shocks.

Second, China’s move into high-tech and sophisticated production will also require reliable regional supply chains for components, services, and logistics.

Asean suppliers stand to benefit by integrating into these advanced supply chains, gaining access to technology sharing and enhanced know-how that can lead to broader industrial upgrades across the region.

Third, the expansion of China’s tech sector could spur both competition and collaboration for Asean tech startups. Opportunities for joint ventures in R&D, digital platforms, and fintech may emerge, enabling Asean entrepreneurs to leverage Chinese financing, expertise, and market access. This dynamic interaction could foster a fertile ground for innovation and cross-border digital ecosystems, driving long-term growth for Asean’s burgeoning tech scene.

Finally, a more advanced Chinese economy will likely drive increased outbound investments into Asean, including investments in infrastructure, manufacturing, real estate, and technology ventures. These capital inflows have the potential to further underpin economic growth in the region and strengthen the overall Asean-China economic partnership. Governments in Asean could capitalise on this trend by fostering investment-friendly environments and deepening bilateral economic ties.

Overall, the likelihood of China transitioning to a high-income country within the next two years is increasing. Asean nations that strategically position themselves to absorb Chinese investments, partner in advanced supply chains, and cater to rising Chinese consumer demand stand to gain the most from this transition, setting the stage for a more integrated and prosperous regional economy.