China has been the poster child for economic growth over the last couple of decades. Since 1978, when the Communist Party began introducing capitalist principles to its economy, China’s GDP has risen sharply.
Recent developments, however, seem to demonstrate that this growth has started to falter. China’s economy grew by 6.9% in the second-quarter of 2015, its worst quarterly result since early 2009, a period when the effects of the financial crisis were at their most devastating.
The Shanghai Composite Index, which has become increasingly volatile in recent times, fell by 30% in a month, causing concern around the amount of inactivity surrounding the country’s imports. The Financial Times stated that the nation’s economic growth would have been even slower if its net exports hadn’t been boosted - if this hadn’t have happened, growth would have decreased further to around 5.7%.
Oliver Blancharch, IMF’s Chief Economist, called the country’s stock market woes ‘a sideshow…that doesn’t reflect on the fundamentals’.
The fundamentals, however, are not as secure as they used to be. ABC noted that China’s industrial production had slowed significantly and that its domestic demand was nowhere near as high as it had been. Despite these warning signals, the Chinese government has yet to reassess its growth targets. The target will stay at 7% for quarterly economic growth, although a number of economists have called for this to be lowered to a figure between 5% and 7%.
However, China will continue to be an important issue for companies around the world. According to a McKinsey report, discussions about the nation won’t be framed in the same way as they were last year. Rather than evaluating whether or not to increase investment in the country, boardroom discussions will be based around whether China is in fact the hotbed for growth it once was, and whether now is the time to reduce company presence in the nation.
There will also now be a heightened emphasis on increasing productivity, especially as the economy can’t rely on growth. This will put pressure on companies to come up with new innovative ways to shape their processes so that they can produce more, or at least the same, with less. This, in itself, could create problems. The same McKinsey report claimed that the increasing use of technology to drive productivity might drive people out of their jobs. This could create social tensions, and will put pressure on people within the country to improve their skills.
The nation’s slower economic growth could simply be a sign of a maturing economy. Developed nations, such as the UK, USA and Japan, rarely go above a 3% growth rate. Gerard Minack, who’s been called ‘the most underrated strategist on Wall Street’ by Business Insider, stated; ‘It's the natural transition from fast-growing economic adolescence to slower-growing economic adulthood.’
This may be the case, but it seems that it’s come a little sooner than the Chinese government had predicted.