- China faces many challenges including a slowing economy, market irregularities like insider trading, unreliable financial disclosures, and social issues. However, China is not regressing and may be at the beginning of its rise on the global stage. - China has strengths that can help it overcome challenges, such as a culture of entrepreneurship, the potential of third- and fourth-tier cities, and innovation capabilities of companies. China's "One Belt, One Road" strategy and patriotism also provide energy for addressing issues. - While reforms will be difficult, stepping back to grow more sustainably is an opportunity for China to transition its economy and tackle challenges through continued determination.

1. EXPERTISES
Besides normal market dri-
vers, human malpractices
played a pivotal role during the
August calamity: insider tra-
ding, market information ma-
nipulation as well as rampant
market irregularities!
After that nightmare, central
authorities have made more
than one hundred arrests and
brought two culprits to public
attention: CITIC securities and
Caixin. According to official
statements, those ‘market ma-
kers’ plotted an almost
seamless plan: from rumour
fabrication, public opinion
manipulation to insider tra-
ding. Not only have numerous
individual investors been trap-
ped, but also the public inter-
vention funds, dedicated to
stabilizing the market, have
been their victims.
This extremely serious event
is though just a tip of the wide-
spread market irregularities
iceberg. It is quite usual that
listed companies are invited to
cooperate with brokers to make
obscure operations on their
stock and co-share gains the-
reafter.
Financial disclosure reliability
is another typical issue for
listed companies in China, des-
pite reinforced control. Ac-
tually the country experiences
serious trust crisis in numerous
spheres.
Even if financial statements
are always accurately dis-
closed, how many individual
investors are able to unders-
tand and analyse them? In
China, around 50% of transac-
tion orders are handled by indi-
vidual investors (of whom only
he Chinese GDP
growth slowdown during the
past years is generating more
and more doubt on its develop-
ment sustainability.The scepti-
cism was exacerbated last Au-
gust by its stock market
turmoil, ‘preceded by two
abrupt yuan depreciation
moves contained by the inter-
vention of the Chinese Central
Bank. While the weeks of
chaos have been withheld by
massive intervention, indus-
trial overcapacity, shadow ban-
king linked with the financing
schemes of local administra-
tions, as well as plenty of other
risk factors are looming over
the Chinese horizon...
However, China is not regres-
sing, as stepping back allows to
target higher! Moreover, we are
probably just at the dawn of
the ‘China decades’: accumu-
lated Chinese soft power would
be released onto the internatio-
nal stage, and we might wit-
ness the renaissance of the
‘Kingdom of the Middle’ as well
as the realization of the
Chinese dream!
Let us remind ourselves of
some fundamentals of China’s
development which help to bet-
ter discern this exceptional set
of dichotomy and challenges:
The Chinese stock
market correlates much
less to the real
economy than its
western peers.
The Chinese stock markets
were established 25 years ago,
in Shanghai (SSE) and in Shen-
zhen (SZSE). While volatility
is an inherent character of
stock market, the Chinese
curve can be astonishing: since
September 2014, the major
index in Shanghai doubled
within 6 months and then sh-
runk by 45% within three
months. The average P/E ratio
is around 15 for SSE while 37
for SZSE and even 70 for
Chinext!
China’s slowdown
Stepping back to tackle
higher
In Mandarin, crisis equals to danger plus opportunity. That is the key to
understand China’s development path, which allows to better discern
challenges, competitiveness as well as other fundamentals of this ‘conti-
nent’ country.
T
BY
Eugénie Dufour,
International Development Manager
@EIM
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58
INTERNATIONAL

2. INTERNATIONAL
Also, due to the shifts of die-
tary regime and life style, non-
communicable diseases are
becoming overwhelming
across the country: cardiovas-
cular disease is the leading
death cause in China, accoun-
ting for 38% of all fatalities in
2010. Obesity, type II diabetes,
high blood pressure and stokes
are arousing public health
concern.
The massive migrant workers
move has resulted in dramatic
social consequences: it is esti-
mated the 253 millions of mi-
grant workers have left 61 mil-
lions of children behind (in
their home villages or towns):
38% of these kids live with
grand-parents while 2 million
even live alone. Without parent
protection and instruction, they
are prone to safety dangers and
criminality misleading; some
leave school prematurely; some
lack care consideration or affec-
tion education. That insuffi-
ciency of psychological deve-
lopment nurturing might lead
to concerning psychic unba-
lance and turn these future
adults marginalized within the
society…
Public authorities have star-
ted to tackle these issues fortu-
nately…
China can address
these challenges, and
we might be at the
dawn of the ‘China
decades’
• China’s social system en-
courages risk taking and
entrepreneurship.
Entrepreneurship is inherent
in the Chinese culture, being
one’s own boss is a dream for a
lot of citizens. Huawei, Ali-
baba, Tencent and Wanda all
stem from a one-man shop or
buddy team. There are entre-
preneurs everywhere: from
billionaire tycoons to ambulant
merchants on the street wit-
hout forgetting millions of sel-
lers on the Taobao platform.
5% hold master diploma); 44%
of the market capitalisation
was held by individual ac-
counts in 2014 on the SZSE.
Their mindset towards stock
markets seems like gambling:
so many other have made a
fortune through stocks, why
not I?
To sub-conclude, the Chinese
stock market is not free. It is
much less correlated with the
real economy than its western
peers, not only because of the
limited number of companies
and government intervention,
but essentially due to insider
trading, financial disclosure
malpractice and the gambling
mindset of individual investors.
The Yuan fluctuation is
quite normal for a
candidate currency for
international
convertibility.
While it is a fact that the
Chinese exportation growth is
sluggish, I do not think a com-
manded currency depreciation
helps due to a dichotomous si-
tuation: it is very challenging
for exporters to pass the ever-
rising costs to customers.
When the CNY depreciates,
their USD revenues shrink al-
beit the increasing domestic
expenditure.
The central authorities are
determined to push the yuan
convertible, as illustrated by
the multiplication of interna-
tional SWAP agreements, QFII
schemes as well as its increa-
sing role as a trade settlement
currency. From my point of
view, the 2% fall was just part
of the normal course of the
CNY internationalization pro-
cess.
China is reshaping its
economic structure and
development model.
China’s GDP doubles almost
every five years: the current 7%
equals to 15% recorded 6 or 8
years ago. It is irrational to ex-
pect constant growth rates.
Gradually decreasing growth is
the Chinese ‘New Normal’: we
might expect 5.5% in 2020
and 3.5% in 2025…
Under that “new normal”
Beijing is looking to boost do-
mestic consumption and to
move away from its export and
investment-fuelled boom.
Growth is slower but more sus-
tainable. More attention will be
paid to job creation.
Actually, China’s ‘trente glo-
rieuses’ has left the country
with a lot of side effects: asto-
nishing air pollution, ex-
hausted environment, striking
resources waste, exasperating
social gap, ghost industrial
parks and huge real estate
bubbles in some districts (only),
as well as the social cultural
disorder: overwhelming supre-
macy of money, too many fast
changes, conflicts between tra-
ditional and modern refe-
rences… the country expe-
riences a serious trust crisis:
largely-spread fake products,
massive fraud in infrastructure
projects and rampant crimina-
lity…
As the low cost competitive-
ness rationale is fading away,
China is reshaping its econo-
mic structure and development
model to climb on the global
value chain ladder. Profound
reforms can only be effectively
conducted under the slowdown
phase which exerts a pressure
as well as a stimulant protector.
The current step back is an
opportunity for not only China
but also the world: if the for-
mer continues to stimulate
growth without carrying re-
forms, the world economic
engine could really break down
in one or two decades.
China faces
unparalleled challenges
The crazy development legacy
as stated in previous chapter is
part of the challenge faced by
China: pollution, food security,
sprawling urbanisation, social
disparity, culturally rooted cor-
ruption, terrorist attack, public
health, exposure to natural
disasters, and last but not least:
development model transition.
While all industrialized
countries have experienced
these difficulties more or less,
those faced by China are more
than exceptional, in view of
the population number, demo-
graphic density and regional
disparity.
It is heavy to develop each
item; I have just put here three
lesser-known facts for your
understanding:
The Pearl River Delta (PRD) is
one of the three economic pil-
lars of the country with GDP
amounting to around USD 900
billion in 2014. However, the
region’s 100-year aggregate
storm surge exposure could
reach about 50 per cent of
GDP, with less than 10% of
assets insured. Decades of pros-
perity can be wiped out in a
single event, as 40% of its eco-
nomic assets have been built
less than 2 meters above sea
level and the sprawling urbani-
sation has jeopardized the drai-
nage capacity of the soil.
China decades ; ‘Trust crisis’;
Reliability of financial
statements
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3. INTERNATIONAL
mendous domestic market size,
extraordinary resilience of the
population...all these factors
will enable China to address
challenges to reach its ‘Renais-
sance’ dream, as predicted by
Napoleon: ‘When China wakes
up, the world shakes’.
Of course, market turbu-
lences will go on and the
country will weather a series of
manageable crises. From a
business point of view, China is
not an el dorado. Any develop-
ment initiatives and investment
decisions require caution and
wisdom.
The Western world seeks a
binary view, while moving dia-
lectic reasoning is an inborn
gift of the Chinese culture.
Western executives are gene-
rally strong at conceiving stra-
tegy but sometimes weak at
execution, talented at innova-
tion might be less gifted at crea-
ting economies of scale, almost
the opposite of their Chinese
counterparts. As far as busi-
ness is concerned, one of the
most rewarding ways might be
a bifocal approach: combine
the Greek thought (deduction,
law, methodology, etc) with the
pragmatism of Deng Xiaoping:
no matter the colour of the cat,
as long as it catches mice. l
The very low social protection
conditions have nurtured that
spirit.The universal social pro-
tection net has only been esta-
blished in China since 2009
and coverage remains very
weak for the majority of the
population.
• 3rd tier and 4th tier cities
conceal huge potential to be
explored.
Public funds have been allo-
cated to these circles to reduce
the urban/rural and regional
development gaps. More and
more migrant workers are at-
tracted to settle down in their
hometowns to either join local
plants or open a small business.
All these trends imply that
these cities might be future
growth relays.
• Chinese champions encom-
pass sound innovation
power.
If you have the chance to visit
the showrooms of Chinese
champions like Huawei, Haier,
Lenovo and Tencent, you will
probably be impressed by their
innovation power. While some
have copied international peers
at the initial stage, these groups
have built their own R&D capa-
city and have fully incorpora-
ted the innovation culture.
Their international network
has contributed to that too.
From a historical point of
view, R&D is not a unique pri-
vilege of Western world: an-
cient China has invented gun-
powder, paper, the compass
and printing technology.
• The ‘one belt one road’ stra-
tegy is not just propaganda;
it might be the concretiza-
tion of the ‘Kingdom of the
Middle’ Renaissance.
One century before JC, China
initiated the Silk Road and has
bolstered international trade
prosperity during almost two
millenniums. That might be
the reason why China was cal-
led ‘Kingdom of the Middle’.
The current ‘one belt one
road’ strategy was conceived in
2013, aiming at multiplying
the historical Silk Road, as it
involves all continents theore-
tically. Also, the ever-increasing
regional free trade zone agree-
ments with neighbouring
countries and the foundation
of the AIIB are all preparations
to concretize the country’s
Renaissance as world center.
If this strategy is carried out
successfully, the current indus-
trial overcapacity in China
might be eased.
• Chinese patriotism entails
very positive energy, and
that is part of the resilience
of the country.
The current sovereign leader
Xi Jinping carries the Chinese
renaissance dream highly. As
he holds full power and is very
determined to lead reforms and
combat corruption, he enjoys
outstanding esteem and res-
pect. Young generations call
him ‘big uncle’ and he really
inspires deep patriotism.
Of course, that rise of patrio-
tism can be interpreted in other
ways:expansionismandthreats
for neighbouring countries.
However, Beijing insists that
China is a peaceful country and
wars will just bring miseries to
population…this debate is not
thetopicforthisdissertationand
fromaneconomicpointof view,
the patriotism entails positive
energy and enhances the
country’s resilience.
Conclusion
To conclude, China is not re-
gressing, the ‘New Normal’ of
growth slowdown is just a step
backward to tackle higher.
Wealth accumulated over the
past three decades, financial
robustness of the central au-
thorities through SOEs, exper-
tise learned from or inspired by
foreign champions, strangle-
hold over strategic raw mate-
rials or assets worldwide, en-
hanced presence within
international organizations,
the smooth deployment of the
‘one belt one road’ strategy, tre-
Risk taking and entrepreneurship ;
Combine Greek thinking with Deng’s cat
pragmatism
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EXPERTISES