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View From China

Working Through the Journey of a Thousand Miles

During a recent visit to Beijing, I found myself standing in the courtyard of the Forbidden City, the former home of Chinese emperors. Only a generation ago, the notion that Westerners would be allowed to roam these once-sacred spaces was a pipe dream. Today, it's routine.

In so many ways, China has progressed immensely in a relatively short span. Economically, China has moved from 11th in the world rankings in 1980 to 2nd today, according to the International Monetary Fund (IMF) as of June 30, 2013. A recent report from the Organization for Economic Cooperation and Development suggested that Chinese gross domestic product (GDP) will exceed U.S. GDP three years from now.

China is still considered an "emerging market" in some circles (including the IMF's World Economic Outlook). That may seem like a misclassification, but recent events provide perspective on China's progress toward economic maturity. As the transition continues, the implications for the rest of the world will be significant.

Challenging terrain
Like many developing countries, China's path to growth was paved with cost-efficient manufacturing and exports. But the recession in western nations, followed by an uneven recovery, has reduced demand for Chinese products. Competition for business from other emerging economies has been growing. While China has generated quite a bit of wealth, domestic consumption is not yet strong enough to compensate.

The result is a declining rate of growth, which has served to expose some of the tenuous financing extended by Chinese banks. Real estate is frighteningly expensive in many cities, with prices fueled by significant amounts of leverage. Officials have been taking a series of steps to curb financial excesses, which initially created a good deal of volatility in Chinese markets.

And the Chinese populace is demanding a better environment, reduced government corruption, and greater freedom to invest outside of the country. Urbanization is proceeding in fits and starts. The new regime, seated last fall, seems to be intent on addressing these concerns.

Slower but steadier
The hope is that China will find a better balanced, more sustainable economic track. Rates of growth may not match the double-digit pace of the recent past, but it may be more lasting. China has become a significant market for multinational companies, a significant export market for the West, and a significant driver of market performance and psychology.

Whether directly or indirectly, we are all invested in China's success. While their road ahead will be challenging, the Chinese have every reason to feel proud about the ground they have already traversed.

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