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| China’s EV sector burns bright but cannot offset property’s woes |
At China's Belt and Road Forum, where Beijing celebrated the 10th anniversary of its substantial $1 trillion infrastructure initiative, the concept of "high-quality development" took center stage. This term, often championed by President Xi Jinping, encapsulates China's aspiration for superior industries. Among these, China's green technology sectors, particularly electric vehicle (EV) manufacturing, have emerged as exemplars of this ambition. China not only leads the way in EV production with its advanced technology and domestic brands but also steadily increases its export volume.
While prioritizing high-quality industries seems like a commendable goal, a pressing question for Beijing revolves around whether these sectors can offset the immediate economic challenges, particularly the deceleration of growth resulting from a prolonged real estate crisis.
At its zenith three years ago, the real estate sector accounted for roughly 30% of China's economy, overshadowing EV production, which held a low-single digit share. A recent report by Goldman Sachs analysts Maggie Wei and Xinquan Chen suggests that each unit of "final demand" in "new energy vehicle" production generates only marginally less domestic value-added for the economy compared to residential housing construction.
By grouping EV production with battery manufacturing for other applications, alongside investments in wind and solar energy generation, these collectively termed "New Three" industries may partly mitigate the long-term decline in real estate. However, the report estimates that until 2027, the property sector's downturn will continue to exert an average net negative drag of 0.5 percentage points on China's GDP growth.
This negative impact is expected to diminish in 2027 when EV production is projected to rise from 6.7 million units in the previous year to approximately 18 million units. By then, electric vehicles are anticipated to constitute around 60% of total passenger car production in China, up from 29% in 2022.
The success of this scenario largely hinges on the willingness of Chinese consumers to spend. In a low-growth situation, production growth would increase by 2% annually, predominantly driven by exports. In a high-growth scenario, Chinese consumers might replace their traditional combustion-engine cars with multiple EVs.
However, a complicating factor is that these greener industries generate fewer jobs. The Goldman analysis forecasts a net loss of 3 million urban jobs in the property, internal combustion engine vehicle, and "New Three" sectors combined in the next year. Growth in the "New Three" sectors is expected to offset approximately half of the 6 million job losses in the property and internal combustion engine vehicle industries.
This presents a challenge for Beijing as it promotes advanced industries, especially in the face of geopolitical tensions with the US. Advanced industries generally do not employ as many people, while many families had around 80% of their wealth tied to property before the downturn. As house prices continue to decline despite government support measures, confidence among homeowners, businesspeople, and entrepreneurs remains elusive.
To restore confidence and revive the economy, Beijing not only needs to stabilize the property market but also implement deeper reforms, including improving social welfare and healthcare access. Structural reforms are undoubtedly challenging, but they might pave the way for the "high-quality consumption" that the state-run media envisions.
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