China’s economy is running at two speeds. What does that mean for Australia?

China’s economy is sending seemingly contradictory signals: exports are performing strongly, while consumers and the property sector remain under pressure.

CommBank Economist and Currency Strategist Carol Kong says both stories can be true at the same time. 

“The best way that I would describe the Chinese economy is it is operating at two speeds,” Kong said.

On one side is an export sector that has remained resilient despite significant external headwinds. Chinese manufacturers have found new overseas markets, while global demand has increased for products including electric vehicles, solar panels and AI-related hardware. 

“From an export perspective, the Chinese economy is doing very well,” Kong said.

“But on the other hand, we’ve got the domestic economy, and it is telling a very different story. Consumer confidence and consumption have been very subdued. Private investment has also been very weak.” 

Property remains a drag on consumers

At the heart of that domestic weakness is China’s prolonged property downturn. 

Kong said falling home values have an unusually large impact on Chinese households because of the significant share of household wealth held in property.

“Housing makes up about 70% of Chinese household wealth. That figure is about 60% here in Australia and about 30-50% in other high-income economies,” she said. 

“So when home prices are falling, that impact on consumer confidence and actual consumption is a lot bigger in China than elsewhere.”

Chinese households have increasingly focused on precautionary savings and paying down debt, making Beijing’s goal of increasing consumption as a share of economic growth more difficult to achieve while the property sector remains under pressure. 

A new growth model

Unlike in previous slowdowns, Beijing has resisted returning to the large-scale property and infrastructure stimulus that helped drive growth in earlier decades.

Kong said this reflects a fundamental change in policymakers’ priorities.

“Policymakers now believe that the old growth model has run its course,” she said. 

“After decades of debt-fuelled investment, they now see the economy as too reliant on debt, too reliant on construction.”

Instead, China is pursuing what policymakers call “high quality growth”, with greater emphasis on productivity, innovation and advanced manufacturing.

“The next stage of China’s development is going to be focused on productivity, innovation and also advanced manufacturing,” Kong said.

“The government’s long-term vision is to build a more resilient and more self-reliant economy, an economy that leads in industries that will basically define the future.” 

Those industries include electric vehicles, batteries, semiconductors, robotics and AI. Kong said technological leadership is increasingly viewed by Beijing through both an economic and national security lens.

“I think the goal has fundamentally changed. The goal is no longer to maximise headline economic growth, but it is to really build a productive, innovative, technological-driven economy.”

The strategy is helping China become increasingly competitive in advanced industries, but Kong said it also comes with trade-offs.

Household confidence and spending are likely to remain subdued while the property market remains under pressure. At the same time, expanding manufacturing capacity alongside weaker domestic demand means more Chinese-made goods will need to find buyers overseas, potentially adding to trade tensions. 

What it means for Australia

For Australian businesses and investors, Kong said the longer-term shift means expectations about China need to change.

“The Chinese economy is not going to grow at 8%, 9%, 10% like it did 10 or 15 years ago. I think those days are certainly behind us,” she said.

“Growth of about 5% is considered a good year for the Chinese economy today.” 

As China directs more investment towards advanced manufacturing and technology, its demand mix may change too.

“In the past, Australia’s fortunes were very much tied to iron ore and also Chinese demand for steel. That may decline in importance in the future as China focuses on advanced technology rather than the old infrastructure and property sectors,” Kong said.

“That is something that Australian businesses will have to keep in mind when they analyse the Chinese economy going forward.”