I was baffled by why some people think a 6.9% growth for a $10 trillion economy is such bad news. The headlines were occupied by China’s economic slowdown, and what a catastrophe it might bring to the world.
To me, slower growth is long expected. It means that the Chinese economy is maturing. Even when I interviewed people in China about 10 years ago, no one had any illusion that the Chinese economy would continue its breakneck speed forever. “At some point,” many told me, “the economy will slow down.”
Now we are at that “point.” I am actually surprised that the high growth period lasted as long as it did. Yes, the volatile stock market was nerve-racking. The industrial overcapacity and high level of debt are alarming. But the government still has tools to address these problems.
For example, the New Silk Roads, or “One Belt, One Road” program, can be a way to help absorb China’s overcapacity in construction and steel. American companies are jumping on the bandwagon. General Electronic, which recently sold its appliance unit to Chinese company Haier for $5.4 billion, saw opportunities in China’s infrastructure projects beyond China’s borders.
John Rice, GE’s head of global operations, told The Wall Street Journal that there is not anything happening in China today that will cause them to alter their long-term strategy. “There is capital in China ready to go where we see business,” he said, pointing to a $1 billion power deal with the Chinese in Pakistan last year.
Maurice Obstfeld, International Monetary Fund chief economist, said at the World Economic Forum in Davos that “stock markets around the world may be overreacting to the threat of falling oil prices and a downturn in the Chinese economy.”
Many seemed to have missed the larger picture. As I wrote here, the Chinese middle class has become a major pillar of the Chinese economy. Consumption contributed nearly 60% of growth last year, and the service sector now accounts for more than 50% of the economy.
A recent report by Boston Consulting Group indicates that rising incomes have kept Chinese consumer optimism at the highest level since 2008. The number of affluent households, or “upper-middle class,” will double by 2020, according to the report. These upper middle class Chinese consumers are on par with those in New York in their sophistication as well as appetite for consumption. They are not just concentrated in Beijing and Shanghai, but spread out in more than 2,000 Chinese cities.
That is why business leaders are bullish about the China market. On Thursday, General Motors announced that it opened a $1.2 billion plant in Shanghai to “build premium-brand Cadillac cars” targeting the luxury market in China. Last year, although the Chinese economy grew slower, Cadillac sold 17% more cars in China than the previous year, and projects 3.5 million luxury car sales in 2020.
As GE’s China chief Rachel Duan pointed out, “focus on volatility in China’s stock market and prolonged slump in the yuan misses the underlying strength of an economy that is still growing at the rate that is the envy of the world…. The underlying growth drivers are still there, whether it’s middle-class spending or infrastructure, the opportunities are there.”