The Economic Marvel Changes Tack

One of most important issues facing not only the tyre industry but also every industry today is the growing impact of China in the world. In this special New Year edition of Talking Tread I would like to take this opportunity to write more about China – what has it achieved and, more importantly, what is still to change in this fascinating country. It’s quite remarkable that the Chinese nation has successfully elevated over 500 million people out of poverty in the past thirty years. It has also grown from under 5% of global GDP output to over 15% of the world’s GDP and is still on track to grow its economy at a rate of 7% per year. It’s the largest mobile phone market in the world and now consistently the largest consumer of iron, steel and cement in the world. And it has built more for its people in the last ten years than any other nation on earth. Deng Xioaping – the ‘architect’ of reforming China – used four key words to describe how China would go about achieving this. The first two were ‘Reform’ and ‘Openness’: China focused on reforming the economy and allowing market forces to play a much bigger role. It has done this whilst ensuring that the country has been relatively protected from big external ‘shocks’ such as the 2008 financial crisis. It also ensured that it employed the maximum opportunities afforded to it from its demographic dividend whilst many Western societies were ageing more quickly. The next two were ‘Stability’ and ‘Consensus’. China has also tried to establish a better rule of law. Whilst there still may be some way to go in this regard, it has moved from a situation of Party opinion to a better set of codified laws now actually in use. This has also ensured effective control whilst opening up society to build enough stability. It has also ensured that there has been consensus on the most important issue facing Chinese society – the elevation of living standards. This consensus has led to a single-minded determination of the leadership to focus on growth to lift people out of poverty. Can all this continue now that China has changed so rapidly over recent decades? There are two very important challenges that the country faces today. Society is now ageing rapidly. China’s one child policy is catching up with it. Today the country’s ‘over 65’ population is 8%. But, by 2040, this number is forecast to be over 23%. The number is more than the population of the three largest European economies combined – all over the age of 65! This has tremendous societal pressure not only on the pension systems but on services and in particular the provision and availability of healthcare. Most importantly for us, this also signals the end of the demographic dividend and the natural associated considerable rise in labour costs. It is no wonder that the Chinese government is slowly changing its policies to allow more couples to have two children. The actual driver of growth of the Chinese economy has fundamentally changed. In the past ten years the engine of growth has been investment for export-led growth. In the last global economic crisis, the Chinese government realized the downside of relying too much on exports. It also foresaw with the rising labour and input costs that it will have to focus on generating internal consumption. In typical Chinese fashion it has achieved this in relatively little time and, today, domestic consumption has surpassed investment for export-led growth as driver of the economy. The Chinese leadership appreciates that for this to continue that they will have to ensure higher incomes for the people – further increasing labour costs. A ruling party communique has already been issued that Chinese workers should all have double their income per capita by 2020. Economists have calculated that this will result in a 10% growth in consumption. And China has a way to go if you measure consumption as a percentage of GDP. China is still relatively low at 35% compared to the USA at 70%. What does this mean for us in Europe? Well it certainly means that the end of the “Cheap China” era is coming. More importantly it tells us that the Chinese consumer is going to be the new ‘King’ and that we should focus more of our efforts on understanding where he will spend those increasing levels of yuan. Changes in China can be described as like a giant wave crashing on to the shoreline. It’s pointless digging in your heels to withstand the efforts and hope that life will be like before the wave came. The best way to deal with a wave is to dive right in. Those that are willing to understand these nuanced changes are in store for a ride of a lifetime!