Prediction: China’s growth will continue to slow

The early new year is a fine time for getting out one’s crystal ball and seeing what the future holds. China-watchers are particularly prone to futurology, given the opaque nature of decision-making in the world’s second-largest economy.

With the economy slowing, consumption beginning to decline and employment growth the most sluggish in years, 2015 set to be a pivotal year for China.

Always interesting to hear is Gordon Orr, a senior partner at global managing consultant firm McKinsey. Orr has released a podcast in discussion with Nick Leung, McKinsey's managing partner for China, and Yougang Chen, who leads the McKinsey Global Institute in China.

“As we look into next year, the gifts that we see are smaller and more modest than in past years,” said Orr. “Economic growth is going to be harder to come by; in many sectors we will see significantly slower growth in 2015.

“Global demand for Chinese products is not likely to pick up phenomenally. Real estate market will continue to be challenged. The government will continue to build infrastructure, but not at a pace that is accelerating from where it is today.”

Chinese consumers have driven growth in China for the past two years, Orr said. This may change over 2015, translating into more moderate growth.

What of wages?

“Business leaders in all sectors are saying we can’t continue to give double-digit wage increases the way we have over the last six or seven years,” Orr said. “It has to slow down, and is quite radically slowing down, especially in white-collar jobs.”

He also sees this year as the end of the “iron rice bowl”, and believes the idea that jobs in state-owned enterprises and government, with all those opportunities for status, high pay, and other perks, are gone for good.

“The private sector has become the driver of job creation in China,” he said, “with official statistics – likely understated – showing an increase of 50 per cent or more in private-sector jobs over the past five years.”

Chinese consumers will feel less financially secure than in previous years, as they deal with a slower rise in wages and the end of long-held ideas, such as a job for life and security from real estate investments.

“Overall, the momentum of their wealth generation will slow dramatically after a decade of remarkable acceleration,” Orr said. “And if they have children graduating from college in 2015, they will likely see them struggle to get a good job.”

He added that lower consumer confidence may then translate into lower growth in discretionary spending.

On the positive side, Orr predicts that China will emerge as an innovative place in 2015, answering the perpetual question about whether the country can truly innovate. “We will finally stop asking that question and focus on the global impact of the innovation that is clearly taking place.”

He also predicts a return for shops offering pirate DVDs, as the government attempts to clamp down on online content through a series of draconian new laws. This could put pressure on virtual private network (VPN) companies to accept UnionPay cards.

Orr reckons cinemas will also benefit, as good-quality online sources for newly released movies have almost entirely disappeared.

The podcast can be found at http://iti.ms/13SxIgp