http://www.mckinsey.

com/global-themes/china/five-myths-about-the-chineseeconomy
http://www.bbc.com/news/business-34040679
http://www.tradingeconomics.com/india/imports
https://www.quandl.com/collections/economics/gdp-as-share-of-world-gdp-at-pppby-country
http://www.mckinsey.com/global-themes/china/five-myths-about-the-chineseeconomy
http://www.worldbank.org/en/country/china/overview

http://www.bbc.com/news/business-34040679

Predictionsofdeepeningeconomicwoesareplentiful.Herearefiveargumentsagainst
thepessimism.

AwidelyheldWesternviewofChinaisthatitsstunningeconomicsuccess
containstheseedsofimminentcollapse.Thisisakindofanchoringbias,1which
colorsacademicandthinktankviewsofthecountry,aswellasstoriesinthe
media.Inthisanalysis,Chinaappearstohaveaneconomyunlikeothersthe
normalrulesofdevelopmenthaventbeenfollowed,andbehaviorisirrationalat
best,criminalatworst.
Theresnoquestion,ofcourse,thatChinasslowdownisbothrealandimportant
fortheglobaleconomy.Butnewseventslikethisyearsstockmarketplunge
andtheyuansdevaluationversusthedollarreinforcetherefrain,amonga
chorusofChinawatchers,thatthecountryslongflirtationwithdisasterhas
finallyended,aspredicted,intears.Meanwhile,Chineseofficials,worriedabout
politicalblowback,aresaidtoignoreadvicefromoutsideexpertsonheadingoff
furtherturmoilandtobeparanoidaboutcriticism.

MyexperienceworkingandlivinginChinaforthepastthreedecadessuggests
thatthisonedimensionalviewisfarfromreality.DoubtsaboutChinasfuture
regularlyebbandflow.Inwhatfollows,Ichallengefivecommonassumptions.

ReadmoreaboutChina
WhatmighthappeninChinain2016?Article - McKinsey
QuarterlyHowChinacountryheadsarecopingArticle - McKinsey Global
InstituteChinasinnovationimperative
Commentary

1.Chinahasbeenfakingit

AkeytenetoftheChinameltdownthesisisthatthecountryhassimplynot
establishedthebasisforasustainableeconomy.Itissaidtolackacompetitive,
dynamicprivateenterprisestructureandtohavecapturedmostofthevalue
possiblefromcheaplaborandheavyforeigninvestmentalready.
Clearly,Chinalackssomeelementsofamodernmarketeconomyforexample,
thelegalsystemfallsshortofthesupportforpropertyrightsinadvanced
countries.2Nonetheless,asChinaeconomyscholarNicholasLardyrecently
pointedout,theprivatesectorisvibrantandtracinganupwardtrendline.The
shareofstateownedenterprisesinindustrialoutputcontinuestodropsteadily,
from78percentin1978to26percentin2011.3Privateindustryfaroutstripsthe
valueaddedinthestatesector,andlendingtoprivateplayersisgrowingrapidly.
Infact,muchofChinasdevelopmentmodelmirrorsthatofotherindustrializing
andurbanizingeconomiesinAsiaandelsewhere.Thehighsavingsrate,initial
investmentsinheavyindustriesandmanufacturing,andeffortstoguideand

stabilizearapidlyindustrializingandurbanizingeconomy,forexample,
resemblethepoliciesthatJapan,SouthKorea,andTaiwanfollowedatasimilar
stageoftheirdevelopment.Thisinvestmentledmodelcanleadtoitsown
problems,asJapansexperienceoverthepast20yearsindicates.Still,a
willingnesstointervenepragmaticallyinthemarketdoesntimplybackwardness
oreconomicmanagementthatsheedlessofitsimpactonneighboring
economiesandglobalpartners.
Furthermore,Chinasreforminitiatives4since2013aredirectresponsestothe
structuralchangesintheeconomy.Thenewpoliciesaimtospurhighervalue
exports,totargetvibrantemergingmarkets,toopenmanysectorsforprivate
investors,andtopromoteconsumptionledgrowthrootedinrisingmiddleclass
incomes.Today,consumptioncontinuestogoupfasterthanGDP,andinvestors
haverecentlypiledintosectorsfromwatertreatmenttoecommerce.These
reformsarecontinuingatthesametimeChinaissteppingupitsanticorruption
drive,andthegovernmenthasntresortedtomassiveinvestmentspending(asit
didin2008).Thatshowsjusthowimportantthereformsare.
2.Chinaseconomylacksthecapacitytoinnovate

Thinktanks,academics,andjournalistsalikemaintainthatChinahas,atbest,a
weakcapacitytoinnovatethelifebloodofamoderneconomy.Theyusually
argueaswellthattheeducationalsystemstompsoutcreativity.
MyworkwithmultinationalskeenonpartneringwithinnovativeChinese
companiessuggeststhattheresnoshortageoflocalplayerswithastrong
creativestreak.ArecentMcKinseyGlobalInstitute(MGI)studydescribesareas
whereinnovationisflourishinghere.5Processinnovationsarepropelling

competitiveadvantageandgrowthformanymanufacturers.Innovationisatthe
heartofthesuccessofcompaniesinsectorsadaptingtofastchangingconsumer
needs,sodigitalleaderslikeAlibaba(ecommerce)andXiaomi(smartphones)
areemergingastopglobalcontenders.HeavyinvestmentinR&DChinaranks
numbertwogloballyinoverallspendingandoveramillionscienceand
engineeringgraduatesayeararehelpingtoestablishimportantbeachheadsin
scienceandengineeringbasedinnovation.(SeeGaugingthestrengthof
Chineseinnovation.)
3.Chinasenvironmentaldegradationisatthepointofnoreturn

Tobelievethis,youneedtothinkthattheChinesearecontentwithadirty
environmentandlackthefinancialmuscletocleanthingsup.OK,theygot
thingswronginthefirstplace,butsodidmostcountriesmovingfroman
agrariantoanindustrialeconomy.
Infact,alotthatsgoodishappening.Startwithsocialactivism.Adocumentary
onChinasseriousairpollutionproblems(UndertheDome),byChaiJinga
formerjournalistatChinaCentralTelevision(CCTV),themostimportantstate
ownedbroadcasterwasviewedover150milliontimesinthethreedaysafterit
waspostedonline,inMarch2015.True,the140minutevideo,whichsharply
criticizesregulators,stateownedenergycompanies,andsteelandcoal
producers,wasultimatelyremoved.ButthePeoplesDailyinterviewedChai
Jing,andshewaspraisedbyatopenvironmentalminister.
Chinaisspendingheavilyonabatementefforts,aswell.ThenationsAirborne
PollutionPreventionandControlActionPlan,mandatingreductionsincoaluse
andemissions,hasearmarkedanestimated$277billiontotargetregionswith

theheaviestpollution.6Thatsjustoneofseveralpolicyeffortstolimitcoals
dominanceintheeconomyandtoencouragecleanerenergysupplies.My
interactionswithleadersofChinesecitieshaveshownmethatmanyofthem
incorporatestrictenvironmentaltargetsintotheireconomicmasterplans.
4.UnproductiveinvestmentandrisingdebtfuelsChinasrapidgrowth

Tobelievethis,youwouldhavetothink,asmanyskepticsdo,thattheChinese
economyisfundamentallydrivenbyoverbuildingtoomanyroads,bridges,
andbuildings.7Infact,asoneeconomisthasnoted,thisisamisperceptioncreated
bythefactthatthecountryisjustverybig.Aneyepoppingstatisticis
illustrative:in2013,Chinaconsumed25timesmorecementthantheUS
economydid,onaverage,from1985to2010.Butadjustedforpercapita
consumptionandglobalconstructionpatterns,Chinasuseisprettymuchinline
withthatofSouthKoreaandTaiwanduringtheireconomicbooms.8
Chinasrisingdebt,ofcourse,continuestoraisealarms.Infact,ratherthan
deleveragingsincetheonsetofthefinancialcrisis,Chinahasseenitstotaldebt
quadruple,to$28.2trillionlastyear,arecentMGIstudyfound.9Nearlyhalfof
thedebtisdirectlyorindirectlyrelatedtorealestate(priceshaverisenby60
percentsince2008).Localgovernmentstoohaveborrowedheavilyintheirrush
tofinancemajorinfrastructureprojects.
Whiletheborrowingdoesborderonrecklessness,Chinasgovernmenthas
plentyoffinancialcapacitytoweatheracrisis.AccordingtoMGIresearch,state
debthoversatonly55percentofGDP,substantiallylowerthanitisinmuchof
theWest.ArecentanalysisofChinasfinancialsectorshowsthateveninthe
worstcaseifcreditwriteoffsreachedunprecedentedlevelsonlyafairly

narrowsegmentofChinesefinancialinstitutionswouldendureseveredamage.
Andwhilegrowthwouldsurelyslow,inalllikelihoodtheoveralleconomy
wouldntseizeup.10
Finally,thestockmarketslideislesssignificantthantherecentglobalhysteria
suggests.Thegovernmentholds60percentofthemarketcapofChinese
companies.Moreover,thestockmarketrepresentsonlyasmallportionoftheir
capitalfunding.Andremember,itwentupby150percentbeforecomingdown
by40.

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Practice?

RumorsdrivethevolatilityonChinasstockexchange,ofteninanticipationof
tradingbystateentities.Theupshotisthatthedirectimpactontherealeconomy
willmostlikelybesomereductioninconsumerdemandfrompeoplewhohave
lostmoneytradinginshares.
5.Socialinequitiesanddisenfranchisedpeoplethreatenstability

Onthisone,Iagreewiththebears,butitsnotjustChinathatmustworryabout
thisproblem.Whileeconomicgrowthhasbenefitedthevastmajorityofthe
population,thegapbetweenthecountrysideandthecitiesisincreasingasurban

wealthaccelerates.Theresalsoawideningbreachwithinurbanareastherich
aregrowingricher.11
Urbaninequalityandalackofaccesstoeducationandhealthcarearenot
problemsuniquetoChina.PeoplehereandintheWestmayfindfruitful
opportunitiestoexchangeideasbecausethepatternacrossWesterneconomiesis
similar.Leadersofthecentralgovernmenthavesuggestedpoliciestoimprove
incomedistributionandtocreateafairandsustainablesocialsecuritysystem,
thoughimplementationremainsamatterforlocalitiesandvariesgreatlyamong
them.

Inshort,Chinasgrowthisslower,butweighingtheevidenceIhaveseen,the
skyisntfalling.Adjustmentandreformarethehallmarksofastableand
responsiveeconomyparticularlyinvolatiletimes.

About the Authors

Jonathan Woetzel is a director in McKinseys Shanghai office, as well as a
director of the McKinsey Global Institute. A version of this article was previously
published on Forbes.com, on October 5, 2015.
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China's Economy Is Not Really The Problem For

U.S. Markets
Once again, disappointing economic news out of China has set investors nerves
on edge. Although the actual decline of Chinas Purchasing Manager Index was
not all that large, a significant improvement had been expected. Thus, hopes for a
turn in that economy were dashed. Realistically, however, China is not the
problem. The real worry is that global slowingand specifically the decline of
industrial production in the United Stateswill drag us into recession. Broad
leading indicators for most global economies show no strong evidence of an
impending recession, but the weakening industrial activity has left an anxious
undertone. Yet when we take a deeper look at the factors that have weighed on
U.S. production, we find that the outlook for industrial activity is probably better
than most investors fear.
The collapse of energy exploration and development played a major role in the
decline of industrial production in the United States in 2015. Over most of the
year, new supply continued flowing into the markets as projects that were already
under development were completed and began producing. In 2016, energy
investment and the price of oil should finally stabilize. While there is little hope
that the energy sector will rebound any time soon, industrial reports will benefit
as energy declines no longer hide growth in other areas.
World trade levels were also worrisome in 2015, as international trade volume
declined 4% from December through May, according to data from the Central
Planning Bureau in the Netherlands. Slowdowns of that magnitude have rarely
occurred unless international economies were sliding into recession. In contrast,
it appears that the 2015 trade slump may have been different. The 2015 decline
seems to have been a short-term correction more than the beginning of a major
decline. Trade volume grew an annualized average of just 2% from 2011 through
2013, but jumped 5% in 2014. That seems to have been too far ahead of the
sustainable trend. The sharp slowing over the first half of 2015 appears to have
corrected the 2014 excess. From May through October of last year, trade started
growing again and looks to be back on track for 2016. While U.S. exporters still

face the challenges of a strong currency, they should nonetheless benefit from a
renewed growth of world trade.
Finally, the U.S. consumer failed to provide as much support for the economy in
2015 as many economists thought they would. Consumers saved roughly $88
billion dollars in gasoline savings over the last year. With disposable incomes
growing and little apparent risk of recession, economists anticipated that
consumers would spend the money saved on gasoline for other things. But
consumers do not seem to have fully redeployed those energy savings.
Admittedly, healthcare costs have become problematic for many families, as they
face healthcare plans requiring them to pay more costs out of pocket. In addition,
college tuition and other essential costs continue to pressure many household
budgets. Consumers may, therefore, be more cautious about spending windfalls
than they were in past cycles. As incomes continue to grow and the energy
savings mount, more of the improving household cash flow could still go into
other spending. That would be a significant positive for the production side of the
economy.
Since the world is clearly awash in surplus manufacturing capacity, no one
expects breakout growth in 2016. We would note, however, that global excess has
been much harder on countries like China, which needs to shift its economy away
from its strong reliance on exports and continued investment in additional
capacity. While growth will likely remain sluggish in most economies around the
world, those with larger domestic consumption contributions may face fewer
problems than the Chinese economy.
What does this mean for investors? Outside the trends in trade and industrial
production, there has been little evidence of major economic slowing in most
economies around the world. That is critical for investors. Since equity markets
typically do not fall sharply outside recessions, the trend of industrial production
this year could be pivotal for the investment markets. If production can begin to
expandeven modestlyfears that the rest of the economy will be dragged into
recession should calm. As we have seen, several factors suggest that industrial
production in the United States should improve. If global economies can continue
to grow, 2016 should be a reasonably solid year for equity investors.