China’s Economic Slowdown: Consequential, Not Catastrophic

In less than a month, 2016 has had no shortage of excitement and uncertainty, as severe stock market volatility in China has had notable ramifications for various economies around the world. In many ways, this panic was inevitable—any economist, Chinese or not, would argue that growth rates in this rising giant were riding a tremendous wave that would ultimately begin to subside. China’s market bubble was bound to burst eventually—that much was certain. What economists could not have predicted, however, was when and in what context such a slowdown would commence.

To best understand the reasons behind China’s wild ride in the stock market during the initial stages of 2016, it is important to recognize that this instability is a significant reflection of a broader structural trend with regard to the country’s economic future. After decades of unprecedentedly high rates of growth, the Chinese economy is experiencing a necessary slowdown—transitioning from an export-heavy manufacturing state into a service-based consumer economy, with increased emphasis on the purchasing power of China’s burgeoning middle class.

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Following stock market turmoil during early 2016, Beijing has sought to stabilize its economy by devaluing its currency, the second time it has done so in six months

Any young economy will experience such a transformation at some point in its development. Yet, what has made China’s wavering market status more concerning is that a tangible stock market panic has exposed a national economy that is slowing faster than officially reported by the Chinese government. In fact, Beijing is so desperate to mask this sharp decline in growth from global investors and companies, it has responded to recent market volatility by devaluing its currency—the biggest devaluation since August, when global market experts and governments accused China of currency manipulation.

After setting targets at 7 percent growth for the year, it is now looking increasingly likely that China will fall short of its goals—to the chagrin and paranoia of Beijing policy-makers. As the country’s official growth slows to quarter-century low, investors are pointing to China as the root of the current global market slump—a worldwide scare that may very well foreshadow a new global recession not far down the road.

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At the 2016 World Economic Forum in Davos, Switzerland, all eyes have been on China’s recent stock market struggles and its potential implications for broader economic decline in China and the world

At the World Economic Forum in Davos, Switzerland, the subject of China’s current condition has dominated discussions, as influential executives from China and other parts of the world deliberate over China’s economic prospects and stability. Many leading executives are calling on Beijing to loosen its tight grip on the Chinese market and promote a free market agenda, enabling recent fluctuation in stocks to identify excess industrial capacity and over-borrowing among the country’s state-owned enterprises (SOEs). Such a process would provide the Chinese government a more tangible picture of which economic sectors to curtail, allowing its slowing economy to continue operating with strength and efficiency. However, President Xi’s current SOE reform agenda—once expected to greatly loosen Beijing’s firm control over the economy—has, instead, doubled down on government regulation to achieve short-term economic development goals. Beijing’s attempts to appease market growth expectations among both Chinese citizens and global investors may subsequently delay such a roll-back process from taking hold—further hindering long-term economic expansion prospects.

Yet, while fears about China’s future economic strength and stability certainly stem from legitimate indicators—such as erratic stock market behavior and domestic industrial overcapacity—most of these concerns reflect the external perspectives of foreign investors and companies. Conversely, leading Chinese CEOs—such as Jack Ma of Alibaba and Ya-qin Zhang of Baidu—have expressed a more hopeful outlook on China’s future economic potential. They have defended the increased competitiveness of Chinese products—such as smartphones, cars, and e-commerce services, among others—within their respective global industries as a signal of future national strength.

These Chinese private sector leaders seem to have a point. The improving quality and competitiveness of Chinese products and services has illustrated the growing dynamism of China’s new x-factor—a rapidly expanding and prospering middle class. As the Chinese economy transitions from manufacturing-focused to service-based, it is undergoing a structural transformation—once dependent on cheap exports, growth will now be driven increasingly by internal consumption.

ChineseBrandTaste
With every passing year, China’s middle class is growing in both numbers and sophistication. It now includes an upper middle class that can afford high-end global name-brand products

Perhaps most significant, however, is that these consumers can now afford to indulge in high-end products. In fact, this class of Chinese has grown so robust, many of these citizens are now considered part of a Chinese upper middle class. Not only can they afford to purchase top quality goods, they are now even developing taste and preference for particular brands—a sign that China’s consumer class is growing in both numbers and sophistication.

Indeed, Chinese consumers are spending more now than during any other time in history. Much of this consumption is among an increasingly young generation, which buys a large amount of its merchandise online. Recognizing the upshot of China’s booming middle class in the midst of a broader economic slowdown, Beijing is pushing to phase out low-end exports and put more emphasis on high-end manufacturing, as well as services that include real estate, hospitality, finance, and retail. Forecasted to double to 100 million by 2020, the number of upper middle class Chinese will account for 30 percent of all urban households, a noticeable increase from 17 percent at present and only 7 percent in 2010. These increasingly affluent Chinese are expected to spend their money on services such as education, entertainment, and other cultural endeavors.

Such trends among China’s booming middle class serve as an encouraging juxtaposition with the more daunting certainty of China’s slowing overall growth. Yet, they also reflect a natural next phase for an economy and broader society that is steadily maturing—a tribute to China’s astonishing growth rates over the course of recent decades.

ShanghaiDevelopment
China’s economic slowdown is also a symbol of a maturing society and market, an important triumph for humanity

While market instability and decreased industrial output are nothing to gloss over, these present realities are an inevitable manifestation indicative of an increasingly developed economy. Thus, this upcoming chapter in China’s modern economic evolution should not merely be viewed with negativity. In many ways, a transitioning Chinese economy is something to be celebrated instead of feared—a symbol of extraordinary human progress, as living standards among the world’s largest national population are improving substantially.

In the meantime, China could do a lot worse than stabilizing at an annual growth rate between 6 and 7 percent, which many experts predict will be the case. This would suggest that the Chinese economy will continue to have a great deal of future potential—a status that will endure as an increasingly developed and matured country steadily adds new sectors, services, and products. Therefore, the more important consideration going forward, in fact, should be how global companies and investors will accommodate these structural transitions to impart future economic prosperity more broadly worldwide.

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