China: Starting All Over Again

Business, China, Company Strategy, Economics, Europe, US


By John Richardson

WE NOW know is that China’s real GDP growth is probably heading into negative territory, perhaps by as early as Q4 – and if not by then, certainly in 2015.

But in order to fully answer “how bad will it get before it gets good again?” we need to also evaluate just how long weaker growth will last and what the implications will be for the global economy.

Here are just a few thoughts on this huge subject:

  • Nobody, really, has a clue because what China is attempting to do involves dismantling and rebuilding an entire economic growth model. To pretend otherwise is intellectually dishonest.
  • What we do know is that we have to prepare for the worst – and then “stress test” our businesses under these worst-case scenarios.
  •  Interestingly, a comment we often hear is that it is outsiders who have the bleakest view of China’s prospects. But on our recent trip to Shanghai, an “insider”, i.e. a Chinese national, told us:
  1. It will take Xi Jinping and Li Keqiang at least five years to reap any significantly positive results from the reform process.
  2.   And there are no guarantees that they will succeed at all.
  3. The reasons he gave for potential failure included the need to create a fair and transparent legal system in order to create a level playing field for innovation. Without such as level playing field, China would fail to sufficiently move up the manufacturing value chain – and so would not escape the “middle income trap”. He pointed that the entire legal system would have to be dismantled and rebuilt in order to make it fair and transparent.
  4. He also talked about the need for a renewed “values system” where people felt the need, because of a stronger sense of social responsibility, to do “the right things”. He worried that the values system had been eroded over the last few decades because growth had been pursued for the sake of growth. “Stronger legal sanctions by themselves will not be enough to stop people from cutting corners on food safety and environmental protection,” he said. Where on earth do you start here?
  5. Xi Jinping’s anti-corruption campaign is proving hugely popular – and makes a lot of sense. But at some point, the campaign will run up against the dilemma that people at levels of society, a few years before they retire, are forced to resort to graft because of the lack of a decent nationwide pensions system. How do you build such a system during a period when local government revenues are falling because the property bubble has burst?
  • And as far as the impact on the global economy goes, the above slide reminds us that since 2009, China’s economic stimulus has dwarfed that of any other central bank.
  • As the stimulus is withdrawn, this will have seven major implications for the world’s economy.

In our post yesterday, we raised two other questions, which were:

  • To what extent can the current government allow it to get bad even if they know it is for the longer term good?
  • And will the government blink too soon when it gets bad and pull back on some of the reforms?

We will attempt some answers in a post later this week.


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