China's Economic Fluctuations and Structural Changes in 2017

Author: Fan Gang, President of CDI

Editor’s Note: The economic downturn in recent years are cyclical fluctuations which are resulted from overheated economy and investment. Besides, the functional and economic significance of the consolidation period of soft landing should not be underestimated. In addition, material consumption is far from over and investment should aim at new consumption models.

The economic downturns in recent years are cyclical fluctuations.

Though China’s economy has been declining for six consecutive years, last year has witnessed some improvements. Deflation, indicated by the Producer Price Index, has basically come to an end in the second half of last year. The main problems now include overcapacity, inventory backlog and debts which are typical cyclical problems and the results of overheated economy and investment. To deal with these problems, we must cut excessive industrial capacity and conduct destocking and deleveraging.

The functional and economic significance of the consolidation period of soft landing shall not be underestimated.

There are different ways to deal with crises. Some market economies have opted for hard landing to address problems by rapid and massive restructuring, yet China is inclined towards soft landing as we do not want to lower the growth rate so much as to turn sporadic problems into systemic ones. The advantage of soft landing is that there will be neither negative growth nor recession while the disadvantage is that it is more time consuming.

It may take some time to address problems such as overcapacity, inventory backlog, debts and supply-side structural reforms. Regarding investment, consolidations, mergers and acquisitions are necessary for a variety of industries to improve concentration, which is in line with the law of the market, namely, survival of the fittest. In this way, China's economic and industrial structure will be further improved and thus lay the foundation for future growth.

Material consumption is far from over and investment shall aim at new consumption models.

China's economic structure is changing as consumption takes up an ever greater proportion. When income reaches a certain level, consumption will start to accelerate. The internet enables consumption to extend to small towns and rural areas.

Material needs are far from being satisfied in China and material consumption is still the primary concern for most Chinese people. Therefore, China's manufacturing industry shall never be ignored from investment’s point of view. Instead, it has great development potential with further adjustment, concentration and upgrading. At the same time, service consumption is indeed increasing and demand is expanding. Spiritual consumption ranging from movies and entertainment to fitness, pension and financial services is on the rise, which is also a major trend.

Nowadays there are debates around the world on the replacement of human employment by artificial intelligence. But if we take a deeper look, we would find that human beings have been trying to use machines instead of human labor to improve productivity, thus bringing about huge space for development of leisure and entertainment consumption.

Overall, in terms of investment, the odds of success will be higher if we pay more attention to using new technologies to meet the needs of the market and adjust the business model according to consumer demand so that supply and demand would be more balanced.