Welcoming the impact of China

China has certainly dominated the headlines in early 2016 as plunging Chinese share prices have sent global stock markets and commodity prices falling at historic rates. It’s as if the West has finally grasped the impact that China now has on all aspects of international business and finance with China now seen as connected and no longer as "somewhere else”. And as China emerges into the light, the authorities there suddenly seem like the rest of us mere mortals as they struggle to find immediate solutions to the volatility.

The inauspicious start to the year comes as China’s growth slows, with the government looking to rebalance the economy away from an investment and export-led model to one based on domestic consumption. Following decades of double-digit growth, the economy struggled to reach its economic growth target of seven percent last year.

This slower rate of growth, which the Chinese government has termed the “new normal”, is here to stay. It is expected that the 13th Five Year Plan, to be unveiled in March, will contain a GDP growth target of 6 percent. The knock-on effects will continue to impact commodity prices, capital goods producers, inflationary pressure and general investor confidence around the world.

At the same time, China is faced with a number of diplomatic challenges that it will need to resolve, in order to ensure continued stability in the region. The South and East China Sea disputes remain hotly contentious, not only for China and its neighbours but also for the US, whose ‘pivot’ to Asia was partly driven by a recognition of the significance of these flash points. Add to that the further deterioration in North Korea and Taiwan, which looks set to hand the pro-independence DPP a resounding victory in this month’s general election, and the challenges for Beijing look daunting. No wonder the battle against corruption continues.

Yet despite these challenges the opportunities for China to find new engines of growth, and the subsequent benefits this will bring to the rest of the world, look promising. The slower rate of growth reflects an economy that is adapting to the requirements of the modern global system, as innovation, the service economy and green initiatives become priorities.

China’s leaders, as recently as last October’s Fifth Plenum and December’s Central Economic Work Conference, have reaffirmed their commitment to a more market-driven, service-led economy, greater investment in entrepreneurship and innovation and more flexibility in fiscal and monetary policies. Examples of the way the Chinese economy is changing as a result include the proliferation of pioneering online commerce companies, the fact that China is now the world’s largest market for industrial automation and robots, and the country’s booming clean energy sector.

Chinese companies’ global footprint continues to expand, as they race to move up the value chain. Chinese outbound investment, which grew by 15.5% and 29.2% in 2014 and the first six months of 2015 respectively, will continue to gather speed in 2016. Overseas markets remain deeply attractive, providing Chinese firms with the opportunity to acquire new technologies, develop managerial talent, access international brands and diversify. President Xi’s recent trip to the UK highlighted the attraction, withup to £40 billion in deals agreed, in industries as disparate as energy, manufacturing, education and finance.

To support these efforts the government is focusing on furthering engagement with the global economy. The Belt and Road initiative, which aims to build a series of land and sea trade routes across sixty countries, stretching from eastern China to as far west as Rotterdam, is one of the most ambitious plans announced in recent years. Domestic companies along the routes, in industries such as energy, manufacturing, services and finance, will have opportunities to partner with ambitious Chinese firms.

So the bears haven’t had the final say. Certainly the Chinese economy is in a period of transition, but one person’s loss looks set to be other’s gain. Iron ore may be out, but new energy solutions, healthcare equipment, mobile internet or high-end retail, for example, are very much in. An $11 trillion economy, even when growing more slowly, is an attractive opportunity in most people’s book, and we must adapt more quickly to China’s growing impact on our lives. 

Simon Whitehead

Hill & Knowlton Strategies Search