Size matters in the global economy. And attention to the global health of China’s economy has much to do with how its vast size makes it a major driver of global growth.

China’s trading partners and global investors are closely watching the health of the world’s second-largest economy as the trade war with the United States fuels fears about a global recession. 

Business in China has been on the rise, but that climb is showing signs of slowing. And China’s leaders are beginning to contend with the country’s slowest pace of growth in nearly three decades. Economic reports at the end of 2019 reveal downbeat Chinese economic data pointing to weaker demand at home and abroad.

Cooling domestic demand, a bruising trade war with the United States, and increased debt have all contributed to the economic slowdown. 

In a recent article published in the Harvard Business Review, Can China Avoid a Growing Crisis?, Dr. Allen J. Morrison and J. Stewart Black point out how China’s economy has much more in common with Japan in the 1990s than is apparent and they suggest some changes that Chinese corporations could do to help them sustain growth. 

Allen Morrison is professor and former CEO and director-general at Thunderbird School of Global Management and a thought leader on global leadership. J. Stewart Black is a professor of Management Practice in Global Leadership and Strategy at INSEAD.

Learning from Japan’s rise and fall

The authors argue that China faces the same challenges that reversed Japan’s economic trajectory in the late 1990s. Economists and business strategists today, they say, can learn lessons from the economic decline experienced by Japan. Morrison and Black argue that China’s share of global business is predicated, as was Japan’s 25 years ago, on a dynamic domestic economy.

“Thunderbird’s Allen J. Morrison explores economic and historic parallels between China and Japan.” – Click to tweet

Morrison and Black conclude that although most Chinese firms are well positioned to use their size and ecosystems for domestic advantage, they are ill prepared for the global expansion they will need to undertake if they are to maintain their newly acquired global rankings.

“We believe that Chinese corporations will have a hard time achieving the productivity gains that will be required in the future,” Morrison and Black wrote. Two serious obstacles, they believe, stand in the way: high levels of debt and a conservative, inward-focused management culture.

A slowdown in China is inevitable, they argue, in part because both state-owned and private enterprises generate the bulk of their revenue from domestic customers. And that growth will be impacted by a falling birthrate that will lead to a shrinking workforce and a subsequent shrinking number of working-age consumers. 

Two key ways a country can compensate for a shrinking workforce, they point out, are by boosting the number of workers through immigration and by boosting the productivity of the remaining workers.

Assessing the outlook for China’s productivity 

Can China correct or compensate for its falling productivity?  

Morrison and Black say the answer to that will depend on the long-term outlook for the main drivers of China’s labor productivity and on the ability of its firms to replace falling domestic revenues with exports (producing in China and selling abroad) and international sales (producing abroad and selling abroad).

In their HBR article, Morrison and Black explore ways to assess the outlook for China’s productivity. They explore the impact of several factors including: 

  • the reality of starting from a low productivity baseline, 
  • migration of workers from rural regions, 
  • growing government debt, 
  • a crisis in corporate leadership 

They suggest that Chinese firms could become more competitive globally by changing in five important ways: 

  • Show respect on the global stage and learn to soften its China-centric mindset
  • Promote inpatration (or bringing global leaders together)
  • Find a healthy balance in expatriation 
  • Invest in leadership development 
  • Innovate outside of China

A partial trade agreement is scheduled to be signed in January and talks between the Washington and Beijing are expected to continue. That’s something that the Japanese did not have to deal with in the 1990s. 

A slowdown in China is inevitable, Drs. Morrison and Black argue, in part because both state-owned and private enterprises generate the bulk of their revenue from domestic customers.” – Click to tweet

But according to Morrison and Black, it’s not global politics alone that will shape China’s global economic future. Chinese corporate leaders need to make some internal cultural shifts. They need to adjust how they see themselves in the world and how they interact with an international workforce and customer base. 

Morrison and Black conclude that “absent a major pivot in thinking and approach, they will be unable to deliver the productivity gains needed to offset the consequences of the steepening decline in the country’s working age population. If the current leadership composition continues, we predict that like Japanese firms before them, Chinese companies will begin to slide off the Global 500.”

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