China is changing

From hard old-economy to soft new-economy!

As the world worries about falling demand from China due to slowing GDP growth and commodity demand slackening, there is a silent shift that is happening in the Chinese economy. An economy that still has 50% of the world’s steel capacity is undergoing a transformation from a hard old-economy to a soft new-economy. Here is how it is changing the way China thinks, acts and consumes.

Shift in growth model…

Over the last few years, the Chinese government had already realized that a growth strategy based on massive capacities and leadership in global consumption was not going to sustain. China was right! That model actually began to falter as prices of oil and commodities across the world began to crash. Oversupply and stockpiling was the new story of oil and most commodities. China had realized that these sectors had saturated and the scope for growing China through these sectors was limited. Even as traditional heavy industries are facing a slowdown, China is increasingly relying on consumption, services and high-tech sectors to fuel the next phase of GDP growth.

The numbers are showing…

Revenues of companies from the internet, satellite communication and telecom increased by 28% in the first quarter of 2016 as compared to the first quarter of 2015. Similarly, companies in sectors like leisure, theme parks, entertainment and karaoke bars saw their top-line growing by 25% on a Q-o-Q basis. So, while the traditional segments may not be growing, there is a subtle shift in growth that is visible.

It’s over to the services sector…

The above Bloomberg chart says it all. The agricultural and industrial sectors are contributing less to the overall growth of China. It is the services sector that is taking over; a typical sign of a maturing economy.

Most of the large economies have gone through this phase, including the US, Europe and Japan. In India’s case, the services sector already accounts for 60% of GDP. That is more because India focused on a services strategy while China focused on a manufacturing strategy. The good news is that China is not slowing, as is popularly feared. It is only the GDP mix of China that is shifting. The world needs to look at China with a new lens… ©

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