Do not underestimate China.

In this blog we have always tried to forecast the growth of the Chinese economy. In contrast to several newspaper articles, we have tried to focus on the facts and on the performance of the Chinese market. Our latest article, which is entitled “Will the Dragon Fly to Its Expected Heights” and can be found at http://www.managementism.com/2012/will-the-dragon-fly-to-its-expected-heights/, was issued on the 6th of June 2012. Now, nearly two months later, we are reading the headline “China Manufacturing Nears Growth Level” in the Financial Times.

The Chinese economy seems to be getting back on track and back on its way to reaching the five-year plan of 8% growth. Still, there are a lot of skeptical people who will say that the increase from 48 to 49% of the purchase manager’s index is not a clear indicator for growth. A purchase manager’s index above 50% shows growth.

These people are theoretically right. With some China experience, we should be much more careful. The Chinese dragon flies to the heights, which is defined by the Chinese government, and the Chinese government becomes more and more professional.

My wife took an MBA course in Shanghai. The teacher, who was American, said, “I can tell you, what decisions the FED will do during the next half year, but not what the Chinese government will decide.”

However, I think it is the other way around. I could predict what the Chinese government will decide, but, for me, it is much more unpredictable what the Fed will decide. We can be sure that the Chinese government will make all necessary decisions to achieve its five-year plan. Some decisions may be made on a trial basis, but it will correct any decision that is not contributing in the right way to the five-year plan. Thus, we should not fear its decisions. In the end, the five-year plan will be achieved.

Looking to the actual situation in China demonstrates this very clearly. The Chinese government had to fight against inflation and the expected housing bubble. It did this very consequently and its actions slowed down the economy. These two elements are now under control. Now, the government has started to stimulate the economy again, but very carefully, so as not to destroy its achievements regarding inflation and the housing market. They are guiding the growth rate back to the 8% projected in the five-year plan.

The Chinese economy is still an emerging economy. It has a lot of potential. It is surely not easy to manage this big country with centralized management. On the other hand, this centralized management assures that no region deviates from the defined path. Thus, in the end, centralized management assures the stability of the whole region. This is the point, because China stays accountable.

Having these principles in mind, working in and with China becomes fun. Study the five-year plan and follow it with your business, even if you do not understand all the plans in the short term. The Chinese government will follow its five-year plan in the end and it needs only small adjustments of our businesses to follow it too.

The present situation clearly shows that China is trying everything in order to achieve the 8% growth predicted in the five-year plan and the companies that did not believe it would are not prepared to conduct business in China’s growing economy.

China is a powerful country and predictable in its decisions. Westerners do not believe it and are discussing different possibilities. These discussions often destroy confidence in the Chinese economy. Due to this uncertainty, companies are making decisions contrary to the five-year plan and losing opportunities.

We should not underestimate Chinese power. China remains, for me, a predictable country.

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