Should we be worried about China’s economy?

I spend a lot of time working with Chinese companies, and visiting the people who build all our gadgets. So I often get questions about the Chinese economy. I am actually fairly upbeat about the prospects for consumer electronics in China in coming years, but my reasoning takes a bit of explaining to peel apart.

First, I should note that I am not an economist. All I know about the subject comes from reading the works of others. In particular, I have been drawn to the writing of Michael Pettis and his China Financial Markets blog. I have referenced him repeatedly in the past on this blog. So maybe he is way off, I am not in a position to judge, other than to say that his writing makes a fair amount of sense to this lay observer.

His main point is that China’s economic model has been driven by debt, especially since the financial crisis, and that all historical precedents show that these kind of debt driven models eventually have to rebalance. There is some evidence that this sort of rebalancing is underway now.

This involves a major slowdown in GDP growth rates, which seems to be taking place. Most people assume that slowing GDP growth is bad for consumer product sales. And certainly, increases in unemployment and other ills, will be a headwind.

On the other hand, China’s economy is large and fundamentally strong. What it lacks is a balance between investment and consumption. China’s growth over the past thirty years has largely been driven by investment spending as the country sought to build infrastructure and capital stock. This has come at the cost of consumption, which now counts for one of the smallest shares of  GDP of any major economy. The key to remember is that what China’s economy needs is to be rebalanced, that is to say it needs an increased contribution from consumption. Mathematically, any rebalancing will need the investment side to slow down. As I mentioned above, there are signs that this slowing is taking place. It is less clear how the consumption side is faring. As the total economy slows, consumption will slow too, but the hope is that it slows less than the investment side of the economy.

Obviously, I am greatly over-simplifying things. There are many factors and trends to account for. Nonetheless, I think that there is the potential for a good outcome in all this. Should the Chinese economy see a rebalancing towards consumption, it should mean just that – consumers will buy more stuff.  (Again, I acknowledge over-simplification.)  If Chinese consumers gain a larger share of the economy they are going to buy more gadgets (and houses, medicine, appliances, etc.)

A lot has to change for this to happen. And the country will need some big changes to complex things like pension and healthcare reform. Moreover, it should be clear that most of any consumer spending will go to domestically produced goods. I would not recommend any US company pin its hopes on a rebound in Chinese consumer spending alone. Nonetheless, despite all the recent negative headlines around China’s economy, there is a real potential for improving demand trends someday. And this will benefit the whole supply chain.

3 responses to “Should we be worried about China’s economy?

  1. Great post! As a native Chinese working in US, it occurs to me that every time I came home I feel less concerned about the economy. Despite all the negative headlines, there’s no doubt that it it almost impossible for outsiders to get a real sense about what’s really going on with the country unless you are among the locals. The underlying demand is inarguable strong and vibrant. More importantly, people are optimistic about the future upside, a rare thing nowadays in any other parts of the world.

  2. Pingback: What might happen in China in 2016? – McKinsey | CHINDIA ALERT: You'll be living in their world, very soon·

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