What You Need to Know About China's Economy
Readers of this journal undoubtedly acquire most business from the automotive and aerospace sectors of the U.S. economy. During their lifetime, readers have experienced increasing competition from Asia, especially China. So, let’s take a special look at this part of our changing world.
According to a McKinsey & Company report, China’s economy is increasingly diverse and volatile. It is expected to exceed $11 trillion in 2016 with GDP annual growth of 6% (others say 6.5%), the slowest rate since the 1990s. This year’s 13th “Five Year Plan” recognizes (and is based in part on) lower interest and exchange rates versus the dollar. Recent years have shown increasing labor and capital productivity that will continue, leading to changes in manufacturing and a more competitive economy.
While some manufacturing sectors have massive overcapacity and a mediocre labor force, 2016 promises a shift in sectors to supply domestic-made consumer goods (where demand reached well over 50% of GDP in 2016) and refocused efforts to “re-skill” labor. Recent decentralization thrusts are now recognized to have failed, but central government will nonetheless increase controls over the 2016-2020 period. The decentralization effort to get the most attention will be on city population dispersal. Also, many economists’ consensus is that many multinational companies will purchase Chinese competitors in 2016.
Other studies provide startling outlooks. China’s global contribution to world GDP will surpass that of the U.S. by 2018. The U.S. generated 21.2% of world economic output in 1970, a figure that remained constant for 30 years. U.S. output dropped to 16.7% in 2015, and it is expected to fall to 14.9% by 2025. Over these same periods, China’s output was 4.1%, rose to 15.6% and is predicted to be 17.2% by 2025. For comparison, India’s GDP output was 6.7% in 2015 and should be 8.7% by 2025. For another perspective, the Chinese public bought 24.6 million autos last year while Americans set a record with 17.7 million cars purchased.
A distressing aspect of China’s economy that must be acknowledged and corrected is political and institutional corruption. The Chinese people know these problems exist, but they are not within practical control of the population to address or resolve.
There are other things that you may not know, but should, that may impact the future of your business. The Asian Development Bank cites China’s output of 43.7% of “high-tech” product exports throughout Asia (for consumption or re-export) as the most significant enterprise in the region. While China’s economy is slowing, the juggernaut remains. China makes 50% of the world’s steel, 55% of the aluminum and 60% of its cement. ArcelorMittal, the world’s largest steelmaker, announced an $8 billion loss in early 2016.
Fair questions that must be answered honestly include:
- Is this a healthy Chinese economy?
- How will the U.S. and other world governments respond to China’s issues?
- One in three luxury goods purchased in the world is made by a Chinese citizen, and 80% are purchased abroad. How does this impact U.S. manufacturing?
- How will the U.S. and other world economies deal with China’s shift from heavy industry to more advanced manufacturing?
Studies by the Central Intelligence Agency state that many environmental factors (soil erosion, air pollution, polluted water) threaten China’s ability to perform. Industrial overcapacity and “misaligned capacity” exist, and inefficient allocation of capital from “central control” poses dangers for the world. For U.S. industry, this means both opportunity and danger. There are also concerns: weaker overseas demand and stronger dollar dampening exports, a strengthening labor market with lower energy and import prices, and no obvious imbalances in the economy.