The publication of China economic growth rate during the 2nd quarter (6.2%) has been received in Western countries with harshness. During the 1st quarter it had been 6.4%, i.e. for the first half of the year inside the 6 to 6.5% fork adopted as the official objective by the government for 2019. This “great slowing” has been denounced because the figure was the lowest since quarterly statistics are published, i.e. in 1992. In fact, the major point, not to say it is an historical one, is that China, during more than 25 years has never had an annual growth rate inferior to 6%, which is without any equivalent in the world. If we consider absolute values, the production and the trade exchanges increase is still huge because its basis is a more and more important GDP.
So what is the reason of such worries? If we set aside the “statistic fetishism” which consists in giving a lot of importance to decimals and the ideological hostility against a country which has not the same political values than Western ones, several negative signals are catching attention. The global indebtedness of the Chinese economy has reached 250% of the GDP, as in the U.S. In Japan it has reached 350%, in France 300% and in Germany 175%. But the debt structure is quite different from these of the other countries because more than 50% weights on companies which worries OECD. To the opposite, household and the State are few indebted. But this distinction is partly artificial because a large share of the enterprises debts is in state-owned enterprises and would be attributed to the State. Regarding private corporate debts and to penalize abuses Beijing has started to leave market forces operate and we saw the apparition of the first payment defaults, which has alarmed financial markets. But this indebtedness is not financed by foreign creditors, to the difference of the U.S. for instance. China has a structural surplus of its current accounts balance, even if there was a significant reduction these last years and China Central Bank has at its disposal reserves for an amount of 3 200 billion dollars. So corporate and State debts don’t carry a systemic risk.
The second source of worries is about the evolution of household consumption: it would “slow”, as car registrations are showing it. They are falling for a year, after having increased from 17 million in 2010 to 27 million in 2018. This market consolidation results from the regulatory environment which is changing to cope with pollution and growing traffic jams in many cities where it is more and more difficult to obtain a registration. But this phenomenon is not representative of the total consumption which will continue to strongly grow due to structural causes. The young generation is aligning its way of life on other developed countries one and has broken with the cultural commitment of their parents and grand-parents to a kind of austerity. As an example, air traffic and tourism are booming.
The impact of trade tensions with the U.S. must not be overestimated.The total China trade surplus peaked in 2015 with 500 billion dollars to fall in 2018 to 350 billion. But the surplus between the two countries has followed an opposite trend. The American deficit during this period grew from 260 to 325 billion dollars because American companies have increased China share in their supply chains. The institution of customs duties will not be enough to incite them to reorganize their production and their supplies. So it will be the consumers who will be affected by the consequences if taxes are kept or made heavier. It is what major CEOs came to tell at the White House last month, which has contributed to soften Donald Trump position and to the revival of the discussions after G7 Summit at Osaka.
The major point today in China is the transformation of its growth model and its inclusion in the world economy. China “factory of the world” and sub-contractor of the planet has permitted its formidable development but is not anymore compatible with the increase of the level of life, of the qualification and the expectations of its population. It is what is worrying the other countries. Used to consider the Middle Empire as a supplier, they find themselves facing a competitor. A top of that, this one has as an ambition with the New Silk Roads to create a network of countries partners facilitating its international development through the construction of infrastructures. Everybody will be a winner to start of course with China because it is its enterprises which are working on these projects. But the related countries will benefit from these equipments which are useful for their development. Critics formulated by these which must be called the former colonial powers are little justified, especially regarding Africa. It they had contributed enough for half a century to the development of these countries they wouldn’t need Chinese money.
The systematic critic of China wouldn’t have a lot of consequences if it stayed inside a debate between economists. But it dissuades French enterprises to be interested in this market. Comparison with Germany is damning: we exported there in 2018 20.7 billion euro of goods when our neighbor sold an amount of 93 billion. We have a strong position in aeronautics, luxury products and nuclear but we should do much better. Two examples of companies, the first one having known many failures and the second a spectacular success show that it is possible to the condition to understand the country and its population expectations.
Peugeot was one of the first car manufacturers to be present in China, along with Volkswagen but it was not able to impose itself to the difference of its competitor which sales today millions of cars. There was a jump in 2014 with the Dongfeng agreement. Peugeot was successful in selling 700 000 vehicles that year. Since then, it is the fall with less than 100 000 registrations during the first half of this year. The supplied cars have not corresponded to Chinese clients expectations. Car ownership is a constituent of their social status. The “French small cars” are interesting them much less than SUV. PSA is now correcting this mistake.
On the opposite, L’Oréal enjoys an exceptional success. China has become its second most important market after the U.S. Twenty years ago, right after the Asian crisis, the company executives did understand the extraordinary potential of the country and created there their first subsidiary. Then, they established in Shanghai, a research center to adapt their products to the local characteristics of skins and hairs and to the population tastes. Today, they take advantage of innovations which allow them to sale their products in the whole country thanks to Internet. L’Oréal also profits from the Chinese society mutation with young people who have irreversibly adopted the Western consumption model. Sales increased in 2018 by 33%.
Instead of permanently denigrating its achievements and to put forward the risks or the challenges China, as other countries, is confronted with, it would be better to look at the reality which would incite our companies to get stronger on this market and to satisfy its consumers who have an insatiable taste for everything which comes from France when it fulfills their expectations.