The recent economic statistics from China are not terribly flattering. Prior to writing this piece I read more than 20 articles from multiple sources and industries, and also reflected on my over 25 years of travel, meeting with and consulting for businesses about their strategies.
The gloomy headlines fail to mention that the People’s Republic has intellectual horsepower, history, and immense resources on its side to figure things out. Unlike so many of its western counterparts, China also has a much more patient outlook. Time is its economic best friend.
All of this being said, there are some realities the Middle Kingdom must confront in the here-and-now:
The bigger you are the harder you fall:
Even being a command and control economy doesn’t absolve you from experiencing the seven to ten year boom and bust cycles that occur in every other large economy across the world. The economic ship will eventually right itself. But especially when systemic problems like demographically influenced labor shortages, industrial trade policies and government debt are involved, a bullet from another stimulus package won’t magically eviscerate the last few months of red ink.
China needs to take a dose of the same patience it painstakingly employs when negotiating with others. It also needs to remember that its measurement yardstick isn’t year-over-year growth, but rather its 5-year performance. It’s currently managing against its 13th plan (2016 – 2020), and a lot can positively happen during that time frame.
Neither past performance, nor reputation, is indicative of future results:
China has had an amazing economic run over the last decade alone. Unfortunately, the better its performance is, the higher everyone’s expectations are for the future. But remember that with any large asset base, the more difficult it becomes to significantly move the economic needle.
China’s immense advantage here is its collective esprit de corps. Every year I’m fortunate enough to bring our BU Questrom business students all over the world, as part of my teaching. By comparison, China’s patriotism is off the charts high.
However, China’s citizens can’t economically have things both ways. So many students enroll in western undergraduate institutions and then re-up for graduate degrees, with a laser-focused goal of obtaining a work visa. But in the same breath they lament the economic struggles of family “back home.”
Amongst all of the possible arrows in the government’s economic quiver, increasing domestic consumption will be of immense, and immediate, help getting China to regain its economic footing—except when over 300,000 of its best and brightest are enjoying the creature comforts of US dormitories and don’t want to leave.
Starting as the world’s 2nd largest economy isn’t a bad negotiating position:
So many China watchers are fixated on the dearth of current and future economic growth. But we can’t forget a true silver lining; China’s middle class has experienced economic prosperity and wealth in a fraction of the time it has taken entire generations to do in the West.
I have witnessed the transformation first-hand; and within seconds can quickly rattle off the names of 5-10 young managers at the companies I visit with my students who used to endure 2-3 hour commutes each way, since those apartments were the only ones they could reasonably afford.
Now several years later, those same executives sport the latest iPhones and travel overseas during every national holiday. I’m not suggesting China should ever rest on its laurels but it’s not as if the country’s economic ranking has torpedoed from, say, 2nd to 10th. True economic improvement does take a lot of time. Fortunately, China has over 4,000 years of history on its side to reference.
Here are some possible steps toward economic resolution:
Settle the Sino-US Trade Dispute:
While I applaud both countries for digging in their heels to protect their respective positions, the economic shot has been clearly heard around the world and keeps reverberating loudly. Political brinkmanship needs to yield to economic pragmatism, even if it involves losing face or handicapping a few industries on both sides of the Pacific.
Under the weight of tariffs, many companies I visit in the US and China have located alternative supply routes to keep their sales afloat. No one wants these to become permanent relationships. But the longer the Trade War continues, the fewer options these companies will have with their 2019 budgets and planning.
Make cross-border commerce easier:
As things keep bottoming out for China, it’s no surprise the People’s Republic needs to protect its own companies, people and industries. In both the Chinese and English media I regularly read, the current bias against several non-Chinese companies is unmistakable.
Tesla’s direct expansion is one of the few positive news briefs of late. I would encourage more of these experiments; even without a partner, Tesla will still employ hundreds of Chinese workers and be an engine for local growth. Simplifying the requisite regulatory frameworks will also help incentivize more worldwide businesses to follow suit.
Keep retraining the workforce:
China has come a long way from its agrarian roots fifty years ago. Very quietly it re-tooled and then relished its moniker as “the world’s factory.” The US is no stranger to a similar transformation; we used to be synonymous as world leaders in steel, automobiles, coal and textiles.
But for both countries, that was then and this is now. To the US’ credit, and albeit with a few slices of humble pie eaten along the way, we’ve re-educated and re-trained. We’re into entirely new industries and services, while still taking great pride buying floormats from WeatherTech, grills from Weber and mixers from KitchenAid, knowing they’re all manufactured locally.
It’s equally exciting to see behemoths like Apple planning for future US plant expansion. China can reinvent itself like it has so many times before. For students who unfortunately can’t secure a US Visa, their bi-lingual, bi-cultural and “bi-business” perspectives will only be accretive to the knowledge base they bring back home.
When Opportunity Knocks:
For so many years investors have bemoaned the ridiculously high Chinese asset valuations. So, too, did foreign investors express similar sentiments in the late 1980s and early 2000’s about the US, only to see corrections pave the way towards unbelievable buying opportunities.
Even if China’s economic malaise gets worse before it gets better, it’s always better to buy low and then eventually sell high. Now is also a perfect time to initiate new US-China business partnerships. The stakes, and expectations, might be more manageable now then they could be if begun in the wake of a torrid growth cycle.