Editorial

Year of the Ram: economic impact

As the pivotal holiday in the world’s largest economy and most populous country, Chinese New Year has an increasingly large impact on corporates across the globe. Prompting the most significant mass migration of people on the planet, the Spring Festival leaves factories empty and sends ripples through supply chains the world over. It also leaves the financial markets quiet, not least because the majority of indices in the Asia region shut for at least a day to mark the event.

We are now entering the Year of the Ram (or goat, or sheep – there is some debate around the animal represented in the Chinese imagery) and people born under this sign of the zodiac are said to be, among other things, calm and stable. They are also said to enjoy good health. Many investors find that they too enjoy good financial health under this sign, as the Year of the Ram has traditionally seen some strong returns.

What’s different about this Chinese New Year, however, is that there are serious question marks hanging over the country’s future growth rate. As we know, 2014 saw GDP growth cool to 7.4%. Although impressive when contrasted against European and US figures, this was the slowest rate of growth that China had witnessed in almost a quarter of a century.

But President Xi Jinping has clearly indicated that analysts should get used to this level of growth as the ‘new normal’. His message is that necessary structural changes taking place in the economy will keep growth below the stellar levels of yesteryear, but will also help to avoid bust and boom cycles. One such change is that the service sector has become increasingly important as an economic driver, and according to KPMG, accounted for 48.2% of China’s economic output in 2014. What this means, of course, is that a shift is taking place away from manufacturing, construction and agriculture.

For countries supplying raw materials to China, in particular Australia, the implications of these changes are significant. And for those companies using China as a cheap manufacturing base, it may soon be time to consider whether other locations in the APAC region now offer the same benefits that China did a decade ago.

Elsewhere, China’s outward direct investment (ODI) is now rivalling foreign direct investment (FDI) – not because FDI is falling, but because more and more Chinese companies recognise that to become increasingly competitive, overseas investment is critical. Not only are they accessing overseas markets, technology and brands; they are also making the most of human capital in these new markets to help them to upgrade and transform their businesses. In short, Chinese companies are adapting to the ‘new normal’ in the best way they know how: innovation.

The takeaway here is that whilst it might seem to the outside world that China is slowing down, in fact the country is taking time to stabilise and to act on strategies that will lead to sustainable growth in the future. Like those born in the Year of the Ram, calm and stable is the name of the game.