China’s Economy is Slowing but is this All Part of the Plan?

China’s economy may be showing signs of slowing down but China will continue to drive global growth for years to come.

China's economy still drives global growth

China’s economy is decelerating but this aligns with government plans

China has been a worldwide economic phenomenon for decades.  Since 1978 its GDP has increased 48 fold. Its workforce now exceeds 800 million with 13 million jobs created in 2015. Exports last year alone totalled US$ 2.28 trillion (about 77% of the United Kingdom’s GDP). China is now the world’s second largest economy based on nominal GDP and is predicted to be number one by 2024.

Economic slowdown

In 2010 annual GDP growth was 10.6%. Last year it was 6.9%. This year the IMF is forecasting 6.3%. The global media has tended to report this news rather dramatically.  Some reports are written as if China was heading for serious recession. This is certainly not the case.  However, slower Chinese growth is the new reality, and the world will have to get used to it. We need to examine why China’s economy is slowing, and to place the “new normal” into a more balanced context.

Why slower growth?

China economic growth constraints

China’s ready pool of labour is dwindling

The factors which produced over 30 years of remarkable growth are coming to an end:

  • cheap and plentiful labour (wages are now similar to Serbia’s; and the sustained one child –related low birth rate is seriously impacting on the numbers of young workers joining the job market)
  • the very high investment levels of recent decades have become unsustainable
  • the high annual productivity gains have become equally unsustainable and corporate performance and returns are falling

In short, the economy is now so large that adding 10% to its value annually is simply no longer feasible. Despite this, in 2016 China will add more than twice as much value to its economy as will the USA to its economy.

What other constraining factors are there?

Other factors developed during the decades of high growth are impacting on economic performance, including:

  • social dissatisfaction.
  • environmental damage from unfettered growth of fossil fuel power generation (80% of total); polluting manufacturing industries and ill-planned construction projects (eg dams).
  • corruption.
  • increasingly outmoded pricing and taxation systems.
  • inability of state-owned companies to produce the right investments for a modernising economy.

What is the government doing?

The slower growth trend is partly Government self-imposed. China’s policy makers made a deliberate decision several years ago to move the economy away from an investment-led manufacturing export driven model to a domestic consumption–led model. To this end the Chinese Government is introducing radical changes to ensure that the “new normal” produces better quality growth and a modern economy matching international norms.

The  Government is already:

  • reducing bureaucratic restrictions on doing business (In 2016 China was ranked 84th globally for ease of doing business).
  • reforming the currency (RMB), including promoting its inclusion in the IMF’s Special Drawing Rights basket, as a pre-condition to achieving a convertible capital account.
  • increasing money supply at twice the GDP growth rate, to help boost consumption
  • opening up China’s bond market, including green bonds (the world’s largest, where $30 to 40 billion is traded annually).
  • promoting financial resources for investment globally.

The aims of the 2016-2020 Five Year Plan, currently under discussion in Beijing, are likely to include :

  1. tackling supply side reforms.
  2. focus on innovation and deregulation.
  3. improving economic transparency.
  4. improving production and management efficiency.
  5. making green development and innovation more central to planning.
  6. reducing poverty and income inequality.
  7. accelerating housing provision and health reform.

China’s economy still open for business

China business opportunities in several sectors

Opportunities in new sectors are growing

During China’s economic transition to more sustainable growth rates, the prospects for doing business with and in China remain very positive. As the economy becomes more green, and the service sector develops and expands, new opportunities will arise across several sectors/sub-sectors. These include: financial services/ management/accounting, trading systems/developing stock exchange, and energy production technologies (e.g. renewable energy, cleaner fuels).

Key Messages 

China´s economy is reforming and modernising. Many new business opportunities are arising in traditional and new sectors. China will continue to drive global growth for decades to come.

 To find out more about China’s economy and doing business go here

Former British diplomat with 36 years’ experience of bilateral relations, commercial promotion and policy advising in Latin America, Europe, Africa and Australasia. Head of British High Commission, Papua New Guinea and Head of the British Embassy in Liberia. David is an experienced networker with a strong track record of promoting UK business in less developed markets.

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