China’s focus shifting to tech-driven growth

It is well recognised that, over the last 30 years, China has been growing at a scorching rate (often double-digit) to become the world’s second largest economy with a current GDP value of about $18 Trillion. The growth was substantially debt-driven and with massive flow of investment in fixed assets, which translated to commodity consumption.

This approach helped the Asian behemoth become a major producer, processor, consumer, and importer or exporter of a wide variety of commodities covering energy products, industrial metals, and agricultural goods. This converted China into a low-cost manufacturing hub and an exporting juggernaut, as an analyst observed.

Around 15 years ago, China’s policymakers decided to shift focus from investment-led growth to consumption-led growth to ensure that the benefits of economic growth spread more equitably among the population. But the consumption to GDP ratio has stagnated around 55 percent while the investment to GDP ratio has remained steady but with declining return on investment.

Economic slowdown

In recent years, China has been facing an economic slowdown with growth gradually tapering down to less than 6 per cent. For 2022, the GDP growth projection is less than 4 per cent. Currently, China is struggling with growth because of multiple factors, including restrictions due to zero-tolerance to Covid policy (lockdowns and restricted mobility), less-favourable demographics, and importantly, continuing trade war with the US since 2017-2018.

It is this background that therecently concluded 20th Communist Party Congress triggered anticipation of a new economic paradigm that may potentially impact commodity markets. China is arguably the ‘mover and shaker’ of the world commodity markets. The market participants found the Congress deliberations did not result in any significant change to economic policy.

Yet, some trends are clear. China is facing a slew of challenges, including real estate downturn, power shortages, and weakening currency (Yuan). A combination of the three will adversely impact the Asian major’s commodity production, consumption, and import. To be sure, China is the world’s largest producer of steel (accounting for close to 50 per cent of global production), a significant producer and consumer of many base metals and the largest importer of crude oil, coal, iron ore, soybean, and cotton, to name a few.

High-quality development

Now, China looks set to go through a major economic transition under President Xi Jinping’s third term as the undisputed leader. ‘High-quality development’ is the new paradigm. The country wants to make rapid technology-driven progress and will focus on artificial intelligence, aerospace technology, and life and health sciences.

In other words, there will be less reliance on debt and real estate for growth. Going forward, China’s commodity intensity of growth may not wane, but the new emphasis on ‘quality of growth’ will mean reduced reliance on commodities and a sharper focus on technology. The emphasis on export is sure to continue but it will be for higher-value-added products rather than lower-value-added ones.

Commodity intensive growth

On the other hand, India finds herself today where China was 25 years ago. In the next two decades, our growth will be substantially commodity intensive. For rapid economic growth, energy consumption is inevitable. Massive investment is planned for infrastructure sector development and multiple logistics options.

For the success of these initiatives, we need a policy environment that encourages investment in the exploration and utilization of finite resources like minerals and metals, as well as a boost to renewable energy. ‘Sustained growth in sustainable ways’ is the way forward.

(The author is a policy commentator and commodities market specialist. Views are personal)

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