China’s economy is slowing down. It’s projected growth rate is set to dip down to as low as a modest 6% versus the jaw-dropping double-digit rates of the past decade or more. In March, the government set its growth target for 2012 at 7.5%. It must be remembered that this is no accident. It is a calculated move. In the most recent five-year plan this general cooling-down is part of China’s strategy to avoid the sort of economic meltdown that hit the U.S. in 2008. They read the tea leaves and decided to take measures, as they can in a centrally-controlled economy, to ensure steady, modest growth rather than bubble-producing frenetic growth. Political stability is a huge factor in this. The communist party maintains its mandate as long as the engines of the economy continue to hum relatively smoothly.
Why the slow down? According to a recent special report in The Economist, nearly 48% of China’s GDP in 2011 was dominated by internal investment in infrastructure and city building. This should come as no surprise to foreign architects who have been riding this wave for the last twenty years or so. The scary part of this number is that most of this investment is being done by state owned enterprises (SOES) operating under artificially favorable conditions. On top of this, according to the ratings agency, Fitch, lending has jumped from 122% of GDP in 2008 to 171% in 2011. This “surge in credit” is strikingly familiar because it looks like the beginnings of America’s financial crisis. As The Economist notes, “When Fitch plugged China’s figures into its disaster warning system (the “macroprudential risk indicator”), the model suggested a 60% chance of a banking crisis by the middle of next year.”
What ramifications does a China slow-down have for foreign firms? Obviously, it means projects slow down or disappear. But this does not mean China is going away. While it will continue to be a vital market over the long term, what foreign firms should prepare for is a gradual shift in the architecture market toward social infrastructure projects.
