Five Questions About China's Latest GDP Growth Report with UMD's Anil K. Gupta

COLLEGE PARK, Md., Jan. 21, 2015 /PRNewswire-USNewswire/ -- China's latest GDP data reinforce the widely held belief that the days of break-neck economic growth are indeed coming to an end. At 7.4 percent, the reported growth rate for 2014 is the slowest since 1990.

Anil K. Gupta, the Michael Dingman Chair in Strategy and Entrepreneurship at the University of Maryland's Robert H. Smith School of Business, says he would "not be surprised if the growth rate were to drop below 7 percent and never cross this pace again."

Gupta, author of "The Silk Road Rediscovered: How Indian and Chinese Companies are Becoming Stronger by Winning in Each Other's Markets" and ranked by Thinkers50 as one of the "world's most influential living management thinkers," has identified, and answers, five key questions pertaining to the Chinese economy:

Does the slowdown in growth rate pose a crisis for China?

"Not by a long shot. This slowdown has long been predicted. In fact, a February 2012 report titled "China 2030" – co-sponsored by the World Bank and the research arm of China's State Council – predicted exactly this type of slowdown. Just as trees don't grow to the sky, there is no way that an economy at the stage of economic development where China currently is can keep growing at double-digit rates for another 5-10 years, let alone longer.

"Even if China's GDP were to grow at a 6 percent rate for the next several years, it's a near certainty that, by 2025, China would overtake the US to become the world's largest economy. Given where China is right now, a 6-percent growth rate is much more sustainable than any artificially stimulated growth rate at a higher level."

What are the implications of the slowdown for foreign multinationals operating in China?

"If foreign multinationals plan for an economy that would grow at a 6-percent pace, they'd do well. Remember, even at 6 percent, China would remain one of the world's fastest growing economies. However, those multinationals that believe that China would keep growing at a 7-8-percent or higher rate will find themselves with overcapacity and would be courting trouble.

"Also, given a slower rate of growth, multinationals can expect tougher competition in China. Gone are the days when their salespeople could mainly be order-takers. Now, they'll have to market and fight for their sales."

What does the slowdown mean for the global economy? Does it create a crisis for the global economy?

"Slower growth rate in China is already causing serious trouble for the exporters of commodities such as iron ore, copper and so forth. Thus, if you are a commodity exporter (such as Australia, Latin America or many African economies), a slowdown in China is not good for you. However, if you are a commodity importer such as India, then lower commodity prices are a positive development."

What should one expect from the Chinese economy over the next five years?

"By 2020, I expect China's growth rate to be in the 5-6-percent range. After that, China should be able to sustain this rate of growth through the 2020s. In terms of domestic job creation, this would not be a problem since the size of the labor force is declining by about 1 percent each year. I do expect, however, that wage growth will slow down. Over the last 5 years, wages have been rising much faster than the GDP growth rate. This trend will moderate significantly. I also expect that, by 2020, China's economy will be a lot more consumption-driven, rather than investment-driven than is the case at present."

Can one trust Chinese GDP numbers and other related statistics?

"Not in the short-term. As even Premier Li Keqiang has admitted, China's GDP numbers tend to be 'man made.' As a managed economy, China engages in massive smoothing of the numbers. This means that, when China's economy was growing at double-digit rates, the government would often under-report the growth. On the other hand, when the GDP growth rate slows down significantly, there is a tendency to over-state the numbers. Thus, for 2014, I suspect that the actual GDP growth rate is slower and the unemployment rate higher than the official statistics.

"In the long run, however, the under- and over-reporting cancels out and one can have reasonably high confidence in the numbers."

Contact:
Professor Anil K. Gupta
Email: [email protected]

Greg Muraski
301-892-0973
[email protected]

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SOURCE University of Maryland's Robert H. Smith School of Business