CHINA AN ECONOMY IN TRANSITION

China has achieved extraordinary economic growth in the last Thirty years. Now, China’s long-term future requires an ambitious restructuring of its economy, developing its domestic consumption over government investment.

China’s economic transformation is necessary not only for China but also for the United States and western countries and we all need to be prepared and understand, the potential challenges to this transition, as well as China evolving role as a global economic superpower.

With a barrel of oil below $30 still in a downward spiral and a glooming crisis between Saudis and Iranian using the price of oil as a new weapon the start of 2016 has seen a lot of hectic adjustments on the world stock markets.
The pundits are predicting Armageddon and everyone is pointing at the Economy of China. But the reality is the Western world and the Wall Street needs to understand better the Transition period that President XI is presiding over.

Beijing has strong leadership and continues its effort to restructure the country’s growth model while not launching a massive stimulus to revive growth similar to the 2008 Obama stimulus. The situations are completely different and Chinese economists understand it clearly.

Let’s focus on China’s maturation and the progress in putting the economy on a longer-term, sounder footing and less on short-term growth rate. For decades China was traditionally enjoying a 10%+ growth rate every economist knew that such a growth was not sustainable on the long run. China however did performed better and longer than expected but China 2016 is a super power entering the Challenges of superpowers with a currency that cannot be “manipulated” like it used to be, with a rule of law starting to become a reality and with a role and International presence that creates obligations. China, because of this incredible sustained growth has boomed its economy and created a huge middle-class soon to triple the US middle class in numbers. As such the transition of China’s economy from investment and huge State directed infrastructure projects to consumption is taking place. China will continue that transition path in 2016 and beyond. Global investors and businesses need to understand it and stop panicking when the rate of growth is only 6.9% a dream number for a majority of the western countries.

This lack of understanding of the world’s second-largest economy is becoming a source of instability for markets world-wide. First we need to understand that China is not managed like the USA and the operators are still learning to maneuver this huge ship. The stock-market adjustment of Summer 2015 combined with a surprise currency devaluation, then followed by additional market turmoil, had more investors inside and outside China questioning the leadership’s ability to manage the slowdown.

The US and western pundits requested a stimulus to allow them to continue to enjoy a 18,000 Dow Jones. But the biggest risk for China is not to slow down but to stimulate the economy at an unrealistic speed. Beijing leadership understands it and does not treat the expected slowdown as a global financial crisis.
China needs for the coming years to adjust its economy to more wide consumption and accelerate structural reforms to adapt to consumer demands. China needs to adjust to reduce overcapacity in industries that are not part of the future; reduce stockpile of unsold homes assisting the banks in landing softly and not precipitating a Chinese version of the 90ies S&L crisis ; opening the doors wider for foreign and private businesses to invest in China’s markets; writing off bad debt; and pushing forward other changes aimed at helping the economy make the transition from manufacturing toward high-end products and services.

But the plan is challenging and President XI still needs to lead the economy to avoid higher unemployment. This is why we will continue to see major infrastructure projects such as the New Silk Road that can guarantees millions of jobs for a long time. Time that Beijing needs to operate the transition of its economy.

China has by culture a long-term approach philosophy and its leadership knows it. President XI will deal with the inevitable challenges and volatilities arising out of the transition. China will not allow the economy to slow down too sharply and will probably manage its fiscal and monetary policies accordingly in 2016.

Despite the slowdown of its overall economy data show that China has made some progress restructuring its economy. Last year, services accounted for more than half of the economy for the first time, climbing to 50.5%. Meanwhile, manufacturing’s share fell to 40.5%.

We are getting far from China the big manufacturer of the World and we need to be prepared to see more and more services and high-end products coming from China.

Are we ready? The concept of the “jobs” shipped to China may reverse soon but it does not mean necessarily that it will come with a rise of wealth in our Western countries.

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www.libra6management.com
Libra6 Management is present in Shanghai and operates in Cleantech, Media, Infrastructure and Real Estate.
www.libra6management.cn.com

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