Yu Xiangrong, chief China economist at Citi [Photo provided to chinadaily.com.cn]
A Citi bank economist has described China’s transition from its old growth drivers to new ones as a “phased success”.
“The downturn in China’s property market since 2021 has turned what was once a major engine of economic growth into a significant drag,” said Yu Xiangrong, chief China economist at Citi.
“Yet overall GDP growth has remained broadly resilient, which suggests that new growth drivers have risen rapidly — indeed, at an accelerating pace — and have largely offset the drag from the old ones.”
In the narrow sense, the real estate sector accounted for more than 8 percent of China’s GDP at its peak but now contributes less than 6 percent. By contrast, the information services sector — a key component of the new economy — accounted for only about 2.5 percent of GDP a decade ago and now exceeds 5 percent.
“If this trend continues, the direct contribution of the information services sector to GDP will surpass that of the real estate sector as early as next year,” Yu said.
Taking into account the property sector’s extensive upstream and downstream linkages, real estate and related industries contributed nearly 30 percent of China’s GDP at their peak. According to Citi’s estimates, however, that combined contribution had fallen to around 13 percent by the end of last year.
Meanwhile, China’s “three new” economy — a collection of economic activities centered around new industries, new business formats and new business models — now accounts for more than 18 percent of GDP.
“The transformation of China’s economic structure is clearly reflected in the data,” Yu said.
The global artificial intelligence boom has further strengthened the role of the new economy, he added. Citi estimates that AI-related hardware now accounts for about 20 percent of China’s total exports.
“From a macroeconomic perspective, China has been fortunate to seize this wave of technological innovation during the property market adjustment, enabling the economy to undergo a relatively smooth transition,” Yu said.
At the same time, he cautioned that technological innovation is both capital- and technology-intensive. While it contributes to GDP growth, it does not necessarily create many jobs. As AI and other advanced technologies become more widely adopted, they may even disrupt the labor market.
“As one of the world’s two leading centers for AI research and application, alongside the United States, China may face a greater impact from these changes than the global average,” Yu said, urging policymakers to pay close attention to employment-related challenges arising from the economic transition.
Citi forecasts China’s real GDP growth for the full year at 4.7 percent, which means the country’s economic growth target of 4.5–5 percent is well within reach.
Economists at the bank believe the second quarter marked the low point for China’s GDP growth this year, with momentum expected to improve in the second half as policymakers roll out additional support measures.
Yu stressed that nominal GDP growth is an even more important indicator this year. Citi forecasts nominal GDP will expand by 6.7 percent in 2026, implying that the GDP deflator will return to positive territory for the first time after years of negative growth.
“If this forecast materializes, China’s nominal GDP growth will reach its highest level in five years,” he said. “If we also take into account the appreciation of the renminbi this year, the GDP gap between China and the United States, measured in US dollars, is expected to narrow for the first time since 2021.”
Looking ahead to the second half of the year, Yu said insufficient domestic demand remains both a key concern for financial markets and a major policy priority.
“Additional policy measures are likely to be introduced in the third and fourth quarters to underpin consumer spending and support overall domestic demand,” he said.
Yu identified two key measures to boost domestic demand, which are both urgently needed and likely to yield more noticeable results.
The first is stabilizing the property market. He believes policymakers still have room to deploy additional macroeconomic instruments. For example, mortgage rates for first-home buyers could be lowered further, while remaining property purchase restrictions could be eased to help stabilize the housing market and improve household balance sheets.
The second is to provide more direct support to households, particularly to encourage consumption. Yu said China should further expand its consumer goods trade-in program in the second half of the year, while ensuring childcare and elderly care subsidies are implemented in a timely and effective manner. The policies should also be more generous, especially childcare subsidies, he added.
“At the same time, China needs to stabilize the labor market, particularly by strengthening support for young people and those in flexible forms of employment, so they have both the confidence and the financial capacity to spend more,” Yu said.
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