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The Chinese Slowdown

11 October 2015 |

What is the issue?

The Chinese economy is worth $10.37 trillion, and is the second largest in the world. With a population of 1.364 billion, China has been a source of significant economic growth over the past few decades. However, in recent years China's annual GDP growth has been falling. The Chinese government has set a target of 7% for annual GBP growth this year, as the economy failed to achieve the 7.5% target set last year. This is the slowest annual GDP growth rate produced by the Chinese economy in 24 years. This slower growth has come as the government attempts to transition the economy to a growth model based on domestic consumption, as opposed to a model reliant on trade with other nations. The government's attempt to rely on domestic consumption to produce growth has been negatively affected by weak consumer spending. Consumer spending in China declined month on month between June and September.

Why does the rate of Chinese Economic growth matter?

As China is a major global economic power house, the economic growth rate in China has far reaching consequences.

Lower Growth Causing Lower Investor Confidence

As Economic growth figures give an indication of the health of an economy, a fall in economic growth in China is likely to reduce investor confidence in the Chinese economy. This means that potential investors will be less likely to invest in Chinese businesses, and investors who have already invested (based upon the expectation that growth would continue to remain strong) may consider selling part or all of their investments to limit their risk. Investment can be defined as "the addition of capital stock to the economy ", and a decrease in investment (resulting from reduced investor confidence) means that China will be even less likely to meet growth targets. This in turn could significantly reduce the share prices of domestic businesses.

Evidence of this is shown by the fact that China's main equity index (The Shanghai Composite) has fallen sharply. It should be noted that this fall has come in spite of measures taken to placate the markets, such as a $19bn fund being created by Chinese brokers to purchase stocks in an attempt to stabilise share prices.

Implications For Professional Services Firms

The uncertainty and volatility in Chinese markets means that it is likely that there will be less listings on the Shangai Stock Exchange. This is because a falling and unstable market would make floating on a stock exchange unattractive for Chinese companies, as the amount of finance they would be able to raise from a flotation would likely to be reduced by the lack of general demand in the Chinese market. The uncertainty in China also means that foreign companies may be less likely to acquire companies in China at this time. This is because this uncertainty makes it difficult to analyse the risks involved in any given transaction. Consequently, it is likely that there will also be less cross border M&A activity. This has implications for professional services firms that would typically advise on such transactions, as a decrease in corporate activity would give rise to fewer opportunities to provide advice. As a result, it is likely that there will be increased competition between professional services firms. Increased competition can lead to clients demanding greater value for money (including more favourable pricing structures) from firms.