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McKinsey: What China Will Look Like in 2016

As far as McKinsey & Company is concerned, China’s current woes may be little to worry about—despite rising costs, unstable currency and increasing competition, China’s share of the global economy will be greater than ever in 2016.

And the $11 trillion economy will become increasingly diverse and ever-more multidimensional.

“The reality is that China’s economy is today made up of multiple subeconomies, each more than a trillion dollars in size. Some are booming, some declining. Some are globally competitive, others fit for the scrap heap,” the management consulting firm wrote in a recent report. “How you feel about China depends more than ever on the parts of the economy where you compete.”

This year in China, some trends, like the service economy’s expansion will continue, and others, like interest-rate deregulation, building more infrastructure and focusing on green initiatives, will become more visible and more important, according to McKinsey.

Money matters

China’s 13th five-year plan will likely have little surprises. The GDP growth target will remain at 6 percent and achieving that target will be a central goal for the country’s fiscal and monetary policies. China’s economy grew 6.9% in the third quarter of 2015—its weakest pace since 2009.

“Expect lower interest rates and pressure on the exchange rate versus the U.S. dollar in 2016. Financial reforms aimed at moving more of the economy toward a market-based allocation of capital will continue,” the report noted.

Manufacturing isn’t leaving China

Manufacturing in China may be changing, but it isn’t disappearing, according to McKinsey.

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The country’s manufacturing purchasing managers index (PMI) stayed below the 50 mark for the tenth straight month at 48.2 in December, which indicates contraction, and provides fodder for talk about manufacturers pulling out of China.

“Let’s be clear: manufacturing is not about to become irrelevant in China,” McKinsey said. “However, the country is evolving toward extremes of performance: the truly awful and the genuinely competitive.”

Chinese companies may be continuously stuck at a sub-50 PMI, but they will find ways to accelerate like improving on marketing skills, acquiring international entities and combining low costs with “aggressive innovation.”

“In 2016, we will realize that in many parts of the economy, a smaller Chinese manufacturing sector is actually a stronger global competitor than ever before. One indicator will be more international acquisitions by Chinese manufacturers,” according to McKinsey. “A second will be more multinationals blaming their lower growth not just on a slowing Chinese economy but also, specifically, on local competitors that are moving upmarket to gain share inside and outside China.”

Fewer jobs, less confidence

Technology has utterly reshaped many industries—textiles one among them—and the advancements are displacing workers. In order to keep good on its promise that all parts of society will benefit from economic growth, China’s government will have to help workers re-skill themselves to be more relevant in the modern market.

Jobs are disappearing in large numbers, the construction sector alone lost a reported 15 million positions in the past year.

“Pressure for higher productivity and on jobs overall will lead to lower growth in household income and, potentially, an erosion of consumer confidence in 2016,” McKinsey explained. “Consumer spending has been responsible for well over 50 percent of GDP so far this year. If the government doesn’t handle less-confident consumers quite carefully, the kind of behavior the stock market experienced last summer will roil the broader economy.”

China’s five-year plan will prioritize productivity growth for capital and labor between 2016 and 2020 and raise the implications of higher productivity for workers.

McKinsey analysts are concerned, however, that implementing aid for workers’ re-skilling will be left to local administration and the regions most in need will have the least amount of money to invest in upgrading its workforce and the least impressive skills to deliver.

Green initiatives

China’s commitments to going more green were reinforced at last month’s COP21 in Paris, and shifts in its sustainable strategies will be key focuses this year.

According to McKinsey, there will tougher emissions standards, more spending on nonfossil fuel development and green finance will be available to companies revamping their eco-initiatives.