China's economy is obviously causing concern right now. It has been such an engine of growth for the world economy that investors get spooked by signs that the slowdown is turning into a 'hard landing' or that Beijing is losing its (to be fair, considerably deft) touch with managing China's sprawling macroeconomy. China's path of unprecedented economic development in recent decades has been little short of sensational, but does that mean the risks have suddenly got bigger? What's changed? I think there is a dawning realisation that China faces some new challenges ahead allied to new concerns that its leaders may not be up to meeting them (though I think it is too early to say that is the case).
My own take is that the big challenges for China are two-fold.
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One is to move the country's economic model on from the state-managed capitalism that has served it so well since an economic reform process and opening up that goes back to Deng Xiaoping in the 1980s. Under the reforms he led, China's 'Socialist market economy' developed with a big state sector and technocratic management allied to the gradual introduction of market mechanisms where deemed appropriate to better manage economic resources and secure growth. The big five-year plans and associated centralised planning suited an investment- and export-led strategy for economic and industrial development. Foreign investment has also flooded in. Domestic demand has gradually grown to account for more of China's GDP. However, there is a feeling in some quarters that the economic model now needs to change to deliver continued high economic growth (that China also requires for political stability). China's current economic slowdown has reinforced these fears and worries that the leadership in Beijing is running out of ideas and is becoming less adept at economic management (the yuan devaluation of a few weeks ago appears to have sent out some wrong messages).
And the second big challenge is related to the first. China's economy, many economists suggest, must move away from the investment- and export-led focus of recent decades (that opportunity – in terms of the global economy – mainly reaped or subject to diminishing returns) and develop much more domestic consumption to drive future economic growth. There are many hopeful signs that this is happening, with the rapid rise of new middle-class consumers in China's many cities. The questions are, how quickly can this happen, how much debt will be created as part of this consumer enrichment and can the main levers for the Chinese economy be effectively managed in Beijing so that China stays prosperous, stable and with sustainable growth? Chinese stock markets have clearly become very nervous about prospects. Maybe that is simply a sign of growing pains, a natural reaction to slowing economic growth. China's leadership will be under a lot of scrutiny in the coming months for signs that it at least understands the challenges ahead and has an effective strategy in place; that would do much to reinforce confidence.
How important is China's economy for the automotive business? Very. One example: General Motors sells more cars in China than it does in the US. It has also been very, very profitable per unit sold for many OEMs. Foreign direct investment in China has surged over the past fifteen years. Suppliers have joined in the fun and also made some big investments. As BMW has described the slowdown in the Chinese car market before, we're perhaps heading into a period of transition to something more 'normal' after an exceptional period, double-digit growth rates moving to single-digit and so on. The good times may not be quite as good for some time to come in this 'new-normal', but China still has massive market growth potential and huge opportunities ahead. The state of the Chinese economy next year, in five, ten years' time, is obviously crucial to market potential and industrial scale being realised.
One thought for the OEM and Tier 1 boardrooms who have long had China at the top of their list for long-term investment strategies: How are you positioned in India (population projected to exceed China's by 2022 at 1.4bn, but with current vehicle market just a tenth the size of China's)?
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