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How China’s business environment will evolve on its way toward advanced-economy status.
For ten years or more, China has been a uniquely powerful engine of the global economy, regularly posting high single-figure or even double-digit annual increases in GDP. More recently, growth has slowed, prompting sharp falls in international commodity prices and casting a shadow over the near-term prospects for developed and emerging markets.
What will happen next? Pessimists struggle to see what China can do for an encore after what they say was an extraordinary, one-off period of catching up. Optimists believe that during the next 10 to 15 years, China has the potential to continue to outperform the rest of the world and to take its place as a full-fledged advanced economy (see summary infographic, “What’s next for China?”).
While most observers look at China at the national or, at most, the sector level, recent research from the McKinsey Global Institute (MGI) analyzes more than two thousand companies in order to identify a set of opportunities for policy makers and business to speed up the transition. This CEO guide discusses this and other recent research to help executives plot their course in China’s fast-changing economic landscape.
A new growth model
Front and center in any discussion about China these days are concerns about the country’s economy. Last year, GDP and employment growth dipped to the lowest levels in 25 years, corporate debt continued to soar, foreign reserves fell by around $500 billion, and by mid-2015 the stock market had dropped by 43 percent—all signs, pessimists say, that China could be on track for a financial crisis.
For those reasons, nearly everyone, including the Chinese government itself, recognizes that China’s investment-led economic model, for all its accomplishments, has to change—and soon. Capital productivity and corporate returns are falling. And MGI’s stress-test analysis finds that the amount of nonperforming loans could reach 15 percent in 2019, from today’s official figure of 1.7 percent. While a worsening of that figure would not necessarily lead to a systemic banking crisis, the collateral damage would likely include a substantial and unnecessary slowdown in growth.
The opportunities identified by MGI have, according to its estimates, the potential to lift labor productivity by 1 to 8 percent per year depending...