High-tech investment a shining light of China's economy: HSBC economist

High-tech investment and exports remain key bright spots of China's economy, supported by strong global demand for advanced manufacturing and Beijing's innovation-driven development strategy, according to an economist from HSBC.

China has built a strong competitive edge in electronics, green technology and advanced machinery, with robust overseas demand continuing to support exports, said Frederic Neumann, chief Asia economist, co-head of Global Investment Research Asia and managing director at HSBC.

The recent energy price shock has reinforced demand for renewable energy technology and electric vehicles, where China's economy excels, while the rapid expansion of AI infrastructure worldwide has fueled demand for all types of electronics, further boosting exports from China, he said.

At home, Beijing's emphasis on innovation-driven growth has boosted demand for high-tech investment and goods, including artificial intelligence-related investments, robotics and biotechnology. Neumann expects both domestic and overseas demand for high-tech products and services to remain resilient through the second half of the year, providing important support for the growth of China's economy.

With exports and high-tech manufacturing continuing to perform strongly, policymakers are likely to keep their focus on strengthening domestic demand. In this regard, any efforts to help accelerate the restructuring of local government finances will be key, he said.

"Not only do local governments have to restructure their existing debt, but they also need to acquire new source of financing to fund their expanded social service commitments," he said.

"This is especially important because relying on land sales as a revenue source is no longer adequate amid the adjustment in the property market."

Although Beijing has made significant progress in restructuring local government finances, completing the restructuring remains a major task and is likely to remain high on the policy agenda in the second half of this year, Neumann said.

Once the process is completed, more funds will be available for investment in social services, which will, in turn, support household spending, he added.

Neumann also said China's progress in innovation and productivity, extending beyond manufacturing into the services sector, has been impressive.

To make high-quality development more sustainable, further efforts are needed to improve consumer spending and support broader-based growth across different sectors of the economy, he said.

"Ultimately, the hope is that innovation and productivity gains will trickle through the economy and lift consumer spending naturally. While true, this process can take a while and therefore active support for households is warranted in the meantime to maintain a balanced and high-quality expansion."

Neumann argued that China has already made substantial progress in shifting its growth model away from excessive reliance on real estate and infrastructure investment.

Once the property market adjustment runs its course, more capital can be reallocated toward sectors that generate higher long-term economic returns, he said, noting that lending has increasingly flowed into high-tech industries.

As infrastructure investment gradually moderates, local governments will also have greater scope to channel resources into healthcare, education and other social services, strengthening human capital and supporting labor productivity growth.

Expanding household income support is critical to unlocking consumption, particularly as China's population ages, Neumann said. Affordable healthcare, adequate pension provisions and increased public spending in these areas could help reduce precautionary savings and encourage households to spend more.

He also called for greater support for young parents — including lower childcare and education costs — to help boost fertility, noting that while the government has introduced a range of reforms, many have yet to gain full traction.

Among the most ambitious reforms is expanding access to public services regardless of hukou, or household registration status. While policymakers have signaled their desire to move in this direction, successful implementation will require adequate fiscal support and will take time, Neumann said.