China’s Direction the Story to Watch in 2016

The last two decades have been dominated by the story of Chinese transformation into the manufacturer to the world. But as so often happens, there is a price to pay for success.

Other emerging states noted the Chinese path to growth and emulated it to the point China has lost some of that low-cost advantage that allowed much of that rapid growth. Now China is entering yet another phase, one characterized by slowing down growth rates. But the world is no more ready for that development than they were for the growth that preceded it.

The 2016 version of China is going to be a big challenge, as there will continue to be slow growth and transition. The events of 2015 illustrate the way that China has increased its influence in the global economy—for better or worse. This was the year that a stock market collapse in China was enough to pull the U.S. Federal Reserve to change its course and delay its rate hike by several months. Given the Fed rarely reacts this strongly to global events, this was significant. China mishandled the currency devaluation and has seemed ill-equipped to be part of the global system given their desire to keep control. The learning curve is steep, but the Chinese are not going to get much opportunity to get it right.

The major issue is whether China is going to be able to stay on track with the economic reforms they launched a few years ago. China grew as fast as they have on the back of an export-centered economy offering a low-cost environment for manufacturing. To keep that system intact means to keep costs (re: wages) low. That also means people will not get paid much and that will make them less than aggressive consumers. Conversely, the new idea in China has been to develop the consumer and let them take the lead. This means wage hikes and that erodes the ability of the country to sell at a low price.

China has regained a little growth momentum in the last few months, but it has come at the expense of the new plan. The export sector is back in vogue, but it clashes with that effort to raise wages. This begs the question: What will China do now?

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

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