China – A Maturing Economy
October 2015 www.coatingsworld.com Coatings World | 49
income disparity between the rich and poor. The building tension results in destabilization of various elements that define
that society and a weakening of the power structure of those
in charge. Hence, the Chinese leadership were eager to pursue
and achieve real growth for China.
The task at hand for the Chinese leadership to even commence a growth strategy was staggering. Hardliners inside the government
did not want anything to do with a
pseudo capitalistic program, they preferred status quo. It was noticed early
on by various Chinese leaders that to
achieve their long range plans it would
require allowing foreign investment of
money, people and technology to come
into China. Hardliners considered this
to be a foreign invasion. At that time,
China didn’t have in place an adequate
infrastructure (physical, intellectual
and legal, business, etc.) to accommodate such an approach. Foreign companies were apprehensive to make any
investment since China had a long history of changing the rules. Needless
to say, it took decades of work by all
involved to get to a point where the
trust and respect between China and
potential offshore investors was sufficient to allow China to make small steps forward in the global
market and their overall long term strategy.
China’s average annual rate of GDP growth from 1987 to
1996 was 10.2 percent compared to its inflation rate which
averaged 12.1 percent. From 2001 to 2014, GDP grew at an
average annual rate of 9. 5 percent (0.7 percent less than the
1987-1996 period), but inflation was much lower, averaging
only 1.9 percent. (See Chart) This is a unique situation since
economic activity at this higher level normally fosters higher
inflation rates. It would be interesting to learn how did China
generate such a high rate of GDP with a corresponding low rate
of inflation?
The emergence of China into the global market has been
a remarkable transformation of their society. Their contin-
ued double digit growth over the past few decades has been
the envy of the world. This is especially true since they
have managed to keep internal inflation rates at very low
levels. However, this growth hasn’t been free. China suf-
fers from enormous pollution problems (i.e. air, land, water,
etc.). There has been constant infighting between high level
Chinese officials regarding is it better for China to continue
as the main exporter of goods or to rely more on developing
an internal market for its products. This internal conflict
has led to a bit of chaos and confusion in many parts of the
government and related industries. As economic conditions
around the globe slowed or even stagnated China noticed a
significant drop in its exported goods. At the same time, the
fledging rise of a middle class inside China also slowed as
companies reacted to the fall off of exported goods. In short,
people stopped buying.
All this was happening at a time when China’s financial
centers (stock market) was showing fantastic growth. In the
May/June, 2015 time period the Shanghai Composite peaked
at more than 5,100 points, a gain of roughly 150% over the
previous 12 months. When the China bubble burst, that index
lost 32% of its value in just 18 trading sessions. The most
recent decline follows on the heels of another huge decline in
July, the combination of which has erased the Chinese stock
market’s 2015 gains entirely. As the reader recalls, stock markets around the world dropped as well following the massive
Chinese losses. This fact reinforces the opinion that China is a
dominant factor in the global financial market.
But what does this mean for China, what’s the real impact
of a falling stock market inside China? In truth, China’s stock
market is not a major part of the Chinese economy, so it’s unlikely that this recent crash alone will expand the economic crisis there. Overall, the stock market plays a fairly limited role
China’s economy. Relatively little Chinese wealth is stored in
shares. More is held in property.
However, the internal political consequences of a falling
stock market could be serious. There is a continuing debate
going on within China’s leadership over what to do about the
economy, and this latest stock market turmoil could push that
debate in a very wrong direction.
It’s entirely possible that the crash might bolster political
factions inside China that want to block critical economic reforms, and weaken factions that do want these reforms. Most
experts believe that China need to proceed with serious economic reforms which are very important for the country’s future. Without these reforms, China will most likely face far more
China: GDP Growth & Inflation, 2001 - 2016
