2015 was a turbulent year for China. Growth in the world’s second largest economy hit a quarter-century low of 6.9%, compared to 7.3% a year earlier, “capping a tumultuous year that witnessed a huge outflow of capital, a slide in the currency and a summer stocks crash.”
For more charts on China’s place in the global economy, take a look at this Forum post.
The New Year has been no less dramatic. China’s economy had what Reuters called a “brutal start to 2016”, and since then we’ve seen further falls in the value of its stock market, sending shockwaves across global financial markets. Here’s a Forum explainer on the events at the start of the year: What triggered such a bad start to 2016?
The International Monetary Fund says it expects China’s economy, a major contributor to global growth, to grow by 6.3% in 2016. Beijing has set an official target of about 7% as it transitions from a state-led investment and manufacturing-led economy to one more dependent on consumers and services.
It’s also important to put the fall in growth into perspective. As the BBC’s Asia business correspondent Karishma Vaswani puts it in this piece, “what goes up, must come down… China’s growth in 2015 was equal to the size of the entire economy of Switzerland or Saudi Arabia. And that’s nothing to sneeze at.”
China’s Business Context was discussed in a Davos session yesterday, which you can watch again in full here.
“It’s a perfect storm,” says American economist Nouriel Roubini, sitting on the panel. “Markets tend to be manic depressive – they go from excessive pessimism to excessive optimism.”
But it’s not too late to avoid a difficult landing, says Roubini. “China will have neither a soft nor a hard landing – growth this year is going to be somewhere around 6%. It’s a bumpy landing, but the good news is that eventually the markets will calm down.”
You can find all of our China related content here.
So, with a new Five-Year Plan being presented in 2016, how can the world’s second-largest economy shift gears without stalling its growth engine?
“I do not believe there is volatility in the Chinese economy,” says Jiang Jianqing, Chairman of the Board, Industrial and Commercial Bank of China, because growth in 2015 was, as predicted, still 6.9%. All the indicators show that China is still the locomotive of the world economy, he adds.
In terms of the markets, continues Jiang, there are elements of volatility, partly caused by sluggish growth in the global economy. Markets are flat the world over. The rate rise in the US and economic policy in the EU has also contributed to this volatility. Meanwhile, commodities are facing a downturn. All of these elements combine to create a new situation for China, and the world.
Is there a misunderstanding in the West about China’s market?
Yes, says Ray Dalio of Bridgewater Associates. The Chinese face four major challenges that have happened repeatedly in other parts of the world throughout history. Let’s not forget, he says, that the US has reshaped its economy many times and has suffered through numerous currency issues.
Let’s not confuse events with the longer term picture. The reforms and leadership in China is fundamentally very good. What we are dealing with should be short-term challenges. The future of China is vibrant and young, and any volatility is global and linked to monetary policy.
China is in the midst of a major transition, says Fang Xinghai and in the process a lot of assets will be revalued. Another factor is the raising of rates by the Us Federal Reserve, and the poor performance of emerging markets. So it’s a combination of Chinese and global factors that are causing volatility.
There is, however, a big issue with communication, says the IMF’s Christine Lagarde. This is leading to something that markets do not like – uncertainty. Better communications would serve China’s transition better.
The IMF, Lagarde says, believes all the changes are manageable if the right policies are taken and the right buffers are in place.
Transitions are very difficult and you just need to stick with it, says Gary Cohn, who also stresses the importance of communicating these changes.
Regarding this communication issue – be patient, says Fang. China is learning. People are asking if there is a strategy in place, and if there is, is it the right one? The answer to both these questions is yes, he argues. The strategy is to reduce investment and expand consumption, to shift more income from the state to the pockets of consumers. “We have the strongest leadership in the world at this point,” he adds.
Can China keep up with market sophistication?
Fang says he has no doubt that China has the talent to adapt. Government service and public service still carries very high esteem in China. The market is complex and sometimes China doesn’t deal with this sophistication as well as it could. “But we’ll learn,” he says.
Unfortunately for China, says Cohn, it is undergoing this transformation in a digital world, while the rest of us did it in an analogue world.
The commitment to market reforms in China is very real, argues Dalio, and leadership is strong. The cyclical adjustment will last 2-3 years and it comes at a bad time for the world, but we will all get past it.
China needs the courage to follow through with its plan to reduce overcapacity in certain industries, such as steel, says Jiang. The industries emerged from the high-growth periods, and now they have to reduce. “This will be painful, there will be a cost,” he says. But only by finishing this reform will China succeed.
How worried should we be about an outright crisis?
Dalio says he we have to look at the impact China has on the world, and the rest of the world has on China. These can combine to create a risky situation.
Perspective is required, says Fang. China is still very rich, so let’s not be too focused on a few days of movement in the markets. Conditions do not point towards a deep depreciation of China’s currency. The structure of the country’s government is such that response to risk is very swift and China will deal with any issues before they become too big.
A certain degree of volatility is alright, says Lagarde. There will be, and there should be, some of it. Markets will sort out small periods of volatility. Governments can step in to manage volatility if it gets too great. Regarding the renminbi, it’s right that the peg to the dollar has to end. There has to be a basket of currencies, and this has to be acknowledged and understood. Again, communication on this issue is essential.
How much will we be talking about China in the next few years?
Given the state of development and its place in the global economy, a lot, says Lagarde. Any significant development in China will impact the global economy, but let’s not forget that the Chinese economy still grew by 6.9% - hardly a collapse.
China cannot allow growth to fall, says Fang, as this will cause too many problems inside the country. But there is no need to worry about a sharp decline in China’s growth rate, businesses in China are still expanding. He cites the example of Ford, which isn’t the biggest car manufacturer in China but still sold 1.07 million cars last year.
Entrepreneurship will also drive China’s economy, says Zhang Xin. Innovation in China is incredibly exciting, and small and medium-sized enterprises (SMEs) will reduce volatility and contribute to growth.
How inclusive will China’s future growth be?
Jiang makes two points. Regarding SMEs, he says these have huge potential to add vitality and this sector can help solve the problem of unemployment. Loans to SMEs are a manifestation of inclusiveness in China – 1.8 trillion renminbi last year. But of course more can be done.
Another aspect of inclusiveness, says Jiang, is China’s commitment to environmental issues.
China, and the world, needs three things, says Lagarde: clarity of communication, clarity of purpose, and the implementation of reforms that have been proposed. And finally, that we are all patient.
There is no locomotive of growth, says Dalio. Zhang agrees, adding that we have to realise that the economy has globalised, and we are all in the same boat.
Good morning, and welcome to the fourth and final day of our Annual Meeting in Davos.
Among today's sessions, we have The Global Economic Outlook with IMF Managing Director Christine Lagarde and British Finance Minister George Osborne. Then a little later we're looking at the top science trends for 2016, and what we can do to preseve our humanity in an age of technology.
While you wait for today's sessions to begin, why not look back at what happened yesterday.
Gary D. Cohn