In 1992, Queen Elizabeth described the year as an annus horribilis (Latin for "horrible year"), citing a series of personal and public crises, including the breakdown of royal marriages and a fire at Windsor Castle.
The same description will often be applied to the Chinese economy and market in 2024. This approach is particularly favoured by the China bears, who have been forecasting China’s collapse since the turn of the century.
Certainly, the economy and the Shanghai Index have had a tough year. However, China is not on the verge of collapse. Many would argue that it is on the brink of new achievements.
China faces the prospect of the middle-income trap, in which economic growth stagnates after a period of rapid development. In this trap, growth falls from the stratospheric 6% or better to the global average of around 3% to 4%.
The China pessimists point to a slowdown in population growth as another looming feature of disaster. These prophets of doom seem to think that China’s leadership is unaware of these problems, so the economy is sailing straight for the rocks.
This ignores China’s record of economic success in dealing with problems that have flattened Western economies, starting with the impacts of the Global Financial Crisis. There is no reason to believe that China is oblivious to its economic challenges.
Resolving these challenges is not a quick fix. Reorienting the economy and economic activity takes time. These changes slow down current economic activity as the economy adjusts and begins to gather momentum in a new financial structure. This gradual reorientation defines 2024 and will restrict economic growth in 2025.
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When productivity increases, the middle-income trap is avoided. Singapore’s founding prime minister, Lee Kuan Yew, understood this. He knew that the city-state could not survive a race to the bottom with the cheapest labour. Survival depended upon increasing productivity and developing new economic foundations, so the monetary base was carefully steered in new directions.
China is doing the same but on a much larger scale. American companies complain that China’s cheap labour is now available in Vietnam and Bangladesh, and this is exactly what President Xi Jinping intends.
But how do you increase productivity? You develop new productive forces. For China, the answer lies not in an increased population but in the increased applications and growth of the digital economy. The digital economy makes increases in productivity possible, enabling the same level of production with fewer hands.
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The decline in population does not mean a decrease in productivity because the fall is compensated for by the increase in productivity enabled by digital advances, smart machines, and AI applications.
The digital economy is all-pervasive, impacting all areas of economic activity and introducing productivity efficiencies in existing processes. The efficient, and therefore cheaper, production of electric vehicles does not depend on an increase in the labour force to assemble the new cars. Instead, increasingly skilled and intelligent robots work 24 hours a day, seven days a week. Production processes depend on technological advances, not mechanical advances.
These same efficiencies are delivered in all aspects of production, service provision, and daily life. On a small level, consider the automatic rice cooker and how it can increase your productivity. In many cities, cash is almost impossible to use. However, you can pay with a face or palm scan.
Compare this with Singapore payment systems. Sitting on the cashier’s counter are three to four payment terminals, one for each bank, and at times, one for each group of credit cards issued by Visa or Mastercard and another for Nets. Sitting behind each terminal is a plethora of transaction and banking systems, employing a significant number of people in mind-numbing repetitive tasks.
In contrast, Chinese merchants have a single terminal and a single integrated payment system that increases efficiency and lowers costs for both the merchant and the customer. Those operating efficiencies make it easier to open a new business because it reduces operating overheads. Productivity increases, business costs fall, and the economy grows.
Applying this transactional efficiency to cross-border transactions suddenly eliminates currency risk, reduces settlement times to seconds, and eliminates counter-party risk due to rapid settlement.
Dismantling the old structures of economic activity and shifting them to new digitally enabled processes takes time. The economy stumbles and stutters during this process. This is what we saw in 2024.
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This process of change also creates a vulnerability which, deliberately or not, was exploited and exacerbated by US trade sanctions, tariffs and other impediments like the Chips Act, which, while limiting access to semiconductors, spurred the development of China’s semiconductor industry and advances.
Making money in the Shanghai market in 2024 was difficult but not impossible. The falling index also delivered excellent opportunities to take positions in the technological changes that will drive the economy and the market in 2025.
Although China’s change process has not been completed, it is well advanced. The tariffs proposed by US President-elect Donald Trump will impact the economy, but they will also spur the changes already taking place. 2024 has, in many ways, been an annus horribilis, but it has set the foundations for the new year to have the potential to be the year China escapes the middle-income trap.
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a former national board member of the Australia-China Business Council. The writer owns China stock and index ETFs
