Financial markets response, this summer, to the shocks which have affected the Chinese economy and to the decisions of Beijing government, reflects two unquestionable facts : the new position China occupies in the world economy and the difficulties, especially in France, to understand  the consequences of this new position for our companies.

During the last ten years, the world looked at China expansion which contrasted with affected developed economies, the “Great recession” in the U.S. following the 2007-2008 financial crisis, and the “Great stagnation” in Europe, which has not ended, provoked by the euro crisis. Between 2007 and 2014 size of the Chinese economy more than doubled and became the world second economy, and even, according to IMF numbers based on purchasing power parities, the first. Chinese exports, thanks to relocations, won the N°1 position in the world and Chinese imports provided to raw materials producers a revenue which exempt them, the Brazil case is a good example, to adapt themselves to the new rules of the globalization. Same situation for financial transactions: China, thanks to the accumulation of its commercial surplus, financed American twin deficits in acquiring, in its currencies reserves, today worth of more than 3500 bn$, Treasury Bonds.

China growth put it at the center of the world without we measure all the consequences of this new situation. Any shock affecting it in the future will have repercussions abroad in proportion of the size of its economy. It is what it’s happening today. But to assess these impacts, it is necessary to understand mechanisms which conducted this economy where it stands now and the nature of the inflexions decided by the authorities to enter a new phase of its development. Regarding this new situation, France was never really convinced by the China success and some official experts or economists were frequently in a position of denial. And French companies, with few exceptions including luxury products and nuclear plants, had, until now, a weak position on this market. So we must make an effort to understand what is happening and seize opportunities generated by current changes.

China is slowing. It is both indisputable and sound. No country ever maintained such high growth rates during more than thirty years. It is why it is needless to alarm and absurd to compare growth rates on long periods. An 5% increase of the Chinese production today is, in absolute terms, three times bigger than the 9% increase, which was common ten years ago. And it is the point because it is this increase in absolute terms which generates trade with China partners.

Chinese economy is changing, and that is also sound. The “low cost” model with tee-shirts and toys made for big occidental retailers is progressively disappearing because Chinese workers got their return from the economic success of their country through wage increases and because new countries with lower costs came on the market. China is redirecting its production basis toward goods with higher value-added, high speed trains, communication equipments and cars. And since Chinese universities are producing hundreds of thousands of engineers each year, they will find jobs and  contribute to the growth of China middle class which way of life will become closer to our own, especially regarding consumption.

Extensive changes of the production basis and necessary slow evolution of internal demand, here are what it’s going on now in China. These changes have obvious consequences on growth but they must be put in perspective. The government supports these changes,   encourages workers to take vacations and even to have Friday afternoons off during summer. In China working less seems to be good for growth…

During the first seven months of the year, industrial production increased by 6,3% and investments by 11,2%. It is definitely less than during the same period of 2014 but many countries would be very happy with growth rates three times smaller. The situation of the car industry is revealing. The number of private cars registered increased from 4 millions in 2005 to 20 millions in 2014. If, in 2015, the car market stabilizes, it will still be, and by far, the biggest market in the world, even since in many cities, local authorities have limited new registrations to fight against traffic jams and air pollution which they generate.

So why the stock market fell and what are the consequences? As we say previously, it is not the fall which was abnormal, it was the rise which came before. Shanghai Index moved from around 2000 at the beginning of 2014 to 5200 in June 2015, before returning to 3100, a 55% increase in a little more than a year and half. Chinese authorities were confronted with a conflict of timing. 2014 rise was already excessive when, in November, to fulfill financial liberalization agenda, a direct access with the Hong Kong market has been opened, which contributed to increase speculation. Since stock market authorities had no experience of crisis, decisions were taken this summer in an emergency context. They provoked the opposite effect and they amplified the fall. It seems that the lesson has been understood and there will be no more direct intervention on the market.

But, pessimists will be disappointed, since economic consequences will be limited. The 2014 rise did not affect growth and for the same reason, the fall, which definitely put in bankruptcy hundreds of thousands speculators, will not have any consequences on the huge majority of Chinese consumers. Maybe these events will encourage them to spend more instead of gambling. A number is revealing: Macao casinos turnover is seven times higher than the one of Las Vegas casinos…

 It is in this context that Beijing made a second mistake, after its interventions on the stock market, in changing the daily management of its currency, the Yuan, to fulfill once again its objectives of liberalization and in order to obtain, for it, the status of a reserve currency, which is definitely a major economic and political objective. The comments which accompanied in France this decision illustrate the constant difficulties we have to understand China. In keeping a fix link to the dollar, the Chinese currency had to accept a reevaluation of 15 to 30% against European and Asian currencies. Was that appropriate when the country was in the difficult process of reorienting its economy? Definitely no. And it risked to being worse with the almost sure prospect of an interest rate increase by the Fed in the following weeks, which would have provoked a new rise of the dollar and, since the two currencies were linked, of the Yuan. In the middle of the stock market crisis, Beijing, ignoring the consequences of its act, decided this reform, asked for years , it is not the least paradox, by the IMF and its occidental members. Once more, the decision was misinterpreted. It was a new conflict of timing.

Since that, situation on the currency market, as on the stock markets, has stabilized: the Yuan fluctuates around 6,38 for one dollar against 6,20 before the reform. Using the devaluation term to qualify this 3% change is excessive and this new flexibility introduced in the relations between China and its partners will facilitate the transition toward a better insertion in the global economy, refocused on the production and the consumption of goods and services with a higher value-added. That is the new China which will emerge from the 2015 summer crisis.

France did not profit, like Germany, of the “Chinese Thirty glorious Years” because, as a matter of fact, it did not believe they will occur. Let’s hope that our companies won’t make a second mistake, won’t be inhibited by the current climate and will understand the opportunities offered by China new growth model.