The main narrative in the last few weeks has made it appear that China’s economy is on the verge of collapse, but the reality is far from this. Opportunity is rife, just not where it has been traditionally.
One could be forgiven for thinking that China’s economy was on the verge of collapse: the end of 2014 saw its economic expansion slow to a 10-year low. In June, the Shanghai stock market began to crash, and in August the government aggressively devalued the Yuan.
However, when placed into context, China’s economy is far from crisis. Rather, it is undergoing a huge economic transition. Beijing is consciously reducing industrial production, liberalising its economy, and doing away with its unsustainable export-led growth to instead focus on the increasingly important role of its service sector.
Any period of economic transition is bound to be relatively turbulent – people lose jobs, companies go bankrupt, and economic governance becomes strained. The questionable policies Beijing implemented are testament to that and were further aggravated by the government’s view that economic losses should be treated as an issue of national security.
The sheer size of China’s economy has also meant that the internal effects of this shift have spilled over its borders. Countries such as Australia and Mongolia, which previously thrived on selling metals and minerals fuelling China’s boom, have suffered disproportionately.
While China’s economic slowdown has caused strain around the world, four factors help explain why it will continue to serve as an important destination for investment:
1. The importance of China’s service sector
China’s service sector is in full expansion, hitting an 11-month high earlier in July. This coupled with Chinese consumers’ increased purchasing power means that China continues to remain an attractive market for companies to sell in.
Australia’s FTA with China had the foresight to acknowledge this trend and, consequently, Australian companies are now in a good position to take full advantage of this growing sector. Numbers demonstrate that China’s service sector is increasingly making up for the fall of industrial production as seen from the Caixin index where anything over 50 indicates increased growth while below 50 indicates shrinking growth.
2. China’s huge potential for further growth
Many are fixated on the belief that China’s economy has grown unsustainably large and that it has now reached its melting point – hence the slowdown. According to GDP, China is the second largest economy in the world. However, when compared against GDP per capita, China ranks 79th place ($7,589 against the US’ $54,597).
Analysts often forget that the income disparity between the coast and inner provinces is vast, indicating that there is still huge potential for the Chinese to become richer and increase their purchasing power. Companies must now compete for this growing segment of the population as the market in coastal areas reach saturation.
3. China is becoming too expensive to produce in, even for Chinese companies
China’s increasing wages and standard of living have also been directly responsible for the draw-down in production. However, this concurrently means that China’s population is getting richer, enabling them to become bigger consumers.
As wages rise, Chinese manufacturers are increasingly moving their operations overseas to neighbouring Vietnam and Cambodia with the aim of selling to Chinese markets. Many foreign companies have also followed suit as the cost of doing business in China soars. Instead, companies should be aiming to sell their best available product to Chinese markets, rather than the second tier models widely available in the mainland.
4. The Chinese government has a firm control of the economic situation
Finally, China’s economic slowdown should not have come as a shock – it was written into the government’s 12th five year plan (2011-2015) which aimed to achieve more sustainable growth around 7%.
While economic data in China is notoriously murky and results can seem unclear, it is worth remembering that Beijing has previously navigated the country through extremely turbulent economic times. Economic reforms during President Deng’s era completely rewrote the basic structure of China and constituted a much bigger upheaval than the current slowdown.
Therefore, despite the turbulent effects resulting from China’s economic slowdown, there continues to be opportunity for sustained growth and for companies to take advantage of this – particularly in the service sector. As such, China is redefining its economy and remains a land of opportunity, just not how it was traditionally.