China more difficult to predict next year: McKinsey

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(Pictured: Gordon Orr)

Investors struggling to come to grips with their exposure to China – whether to double up or down after the recent sharemarket jump – will find the decision even more difficult next year. McKinsey & Co’s veteran China watcher, Gordon Orr, presents his predictions.

Orr, a director of McKinsey’s Shanghai office, says in his annual outlook for China, that the big question facing the domestic economy is consumer behaviour in the face of an economic slowdown.

Big themes from 2014 will continue next year, he says, but the major new theme will be declining consumer confidence on the back of declining income growth. Private consumption, which has accounted for about 50 per cent of China’s GDP growth in recent years, will fall next year.

Orr says: “Next year will likely see the lowest annual income growth in China for at least a decade, with knock-on implications across the economy. Early signs are already there.

“Government data show urban disposable income rose in single digits year on year in the first nine months of 2014, a hint at the big shift that is under way.

“The vast majority of the economy has seen double-digit wage growth for the past decade, with the minimum wage in many cities doubling in less than five years. This has created an expectation that this is simply the new normal for income growth. It is not.”

One interesting word of warning to other China watchers from Orr is that, he says, official statistics, which are often questioned by international investors, tend to be less accurate in times of economic slowdown.

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