3 reasons to take the long view on China

In recent years, there has been a shift in the narrative on China: The previous decades’ positive drumbeat on its economy has been replaced by scepticism about its ability to deliver strong growth. The publication of any new data or news about its markets can create immediate jitters among global investors – and the outlook for the country, if you read the papers, seems more fragile than just a few years ago.

China is vast and diverse, and understanding it well presents challenges. The country is, among other things, contending with an ageing population, rising debt and a troubled property sector. But these challenges are not unique to China. As with elsewhere, I firmly believe that we need more connectivity and engagement, and a better understanding of each other’s markets to overcome the challenges that define the 21^st century.

China has an outstanding track record of addressing complex problems, and in recent decades it has fundamentally transformed its economy. Quietly and steadily, it is doing that again: evolving, charting a new path forward and changing in front of our eyes.

Its economic rise has been remarkable by any measure. Within a single generation, hundreds of millions of Chinese people have been lifted out of poverty; and the country has become an economic and technological leader. All while weathering an Asian financial crisis in 1997-98 – and a global one 10 years later.

In the third quarter of 2023, China’s economy expanded faster than expected, with GDP growing 4.9%, prompting several institutions to upgrade their 2023 forecasts. For instance, the IMF now expects China’s economy to grow 5.4% in 2023, up from its previous forecast of 5%. It is also on track to contribute around a third of global growth in 2023.

Looking to the future, China’s ability to continue to foster and generate new sources of growth will be crucial to its own future, as well as that of the globe.

China is already taking a global lead in innovation. Supported by proactive public investments in science, technology, engineering and mathematics education, as well as R&D (a total of $418 billion invested in R&D in 2022), the country now accounts for the most patent filings in the world and is home to the second-biggest number of technology unicorns after the US.

Its innovation style is consumer-focused and iterative – with many breakthroughs relying on a catalogue of enabling technologies, built and executed by those that have gone before. Chinese AI platform companies have made breakthroughs in areas such as speech recognition and language processing, equipping Chinese businesses with operational and competitive advantages in their fields.

In the consumer market, Chinese companies have made significant advances in home appliances, EVs and consumer electronics. For example, Chinese smartphone brands account for half of the world’s global smartphone shipments, and four out of the 10 most-downloaded US apps are Chinese.

China’s recent advances in smartphone chip technology show that its innovation engines are running at full speed. In the end, if economic progress is – at least in part – determined by a country’s capacity to innovate and successfully commercialize inventions, then there is reason to believe that China will be able to maintain its strong growth.

The innovation engines powering China’s success in consumer goods are also behind its leading position in many aspects of green technology. And here, China is not only staking its claim, but also setting the pace for the world.

In 2022, China invested $546 billion in energy transition, which included solar and wind energy and electric vehicles and batteries; nearly four times as much as the US. Its investments have resulted in leading positions in key technologies such as EV batteries and solar energy. China currently produces 80% of the world´s solar manufacturing capacity, and the International Energy Agency expects 14 million new electric cars will be sold globally in 2023, of which over 8 million will be produced in China.

In addition, China has publicly declared its commitment to carbon neutrality by 2060. And many local governments are executing on this across the country, taking a pragmatic approach by initiating decarbonization plans for the short-term (e.g. green bonds) and the long-term (e.g. climate tech R&D).

Achieving a low-carbon economy is as essential to China’s growth and prosperity as it is for other countries. In its 14^th Five-Year Plan, the Chinese government made a big push on renewables, including targeting to increase its renewable energy generation by about 50% by 2025, from 2020 levels. This is already taking shape: In 2022, 32% of China’s power output came from renewable sources, up from 17% in 2008.

China’s capital markets have grown significantly in line with its economic development – supporting the country’s transformation and underpinning wealth creation for millions of people.

China’s onshore equity and bond markets are the second largest in the world. And China was the top equity capital raising market in 2022, accounting for 39% of global IPO issuance, and is on track to maintain its leading position in 2023. It’s a remarkable feat when you consider that the Shanghai and Shenzhen stock exchanges were only established in 1990.

But the story doesn’t end there. The big bang of finance – the process through which China’s capital markets are expected to grow from $30 trillion to $100 trillion in the next decade as the economy opens up, pension reforms take place, and Chinese investors shift their wealth out of real estate and bank deposits and into the capital markets for more sophisticated investment opportunities – is well under way.

What these developments tell us is that there is significant, long-term structural change taking place in global capital markets – with the centre of gravity slowly moving east.

These are reasons to be optimistic about China’s long-term prospects. The country remains a global powerhouse, with many levers available to it to drive growth and generate new opportunities. What’s more, China has the policy resources to solve its economic headwinds. For example, its urbanization rate has just reached the world’s average of 60%, and the government is actively promoting the construction of affordable housing for low- and middle-income groups. As long as China continues to encourage rural-urban migration, there will continue to be large demand for real estate in major regions.

Hong Kong has a big role to play in China and the world’s journey ahead. A city famed for global connectivity, its capital markets’ Connect programmes have made it easier for international investors to access China’s financial markets, and vice versa. Hong Kong’s capital markets are also helping connect China’s globally minded entrepreneurs and innovators with capital and a vast range of professional services. HKEX’s new listing regime for specialist technology companies is a prime example of this.

At HKEX, we are fully committed to supporting the development of new technologies and making it easier for the world to tap into the array of opportunities emerging in China – which, this time around, will come from its relentless innovation, green energy commitments and increasingly sophisticated and scaled capital markets.

The China that is emerging is multi-faceted, exciting, connected and significant. It’s time for global leaders to take a long view, because the fundamentals are compelling. And it’s also time for global leaders to re-recognize the importance of mutual cooperation and exchange for our collective progress.