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The collapse of the Shanghai stock market at the end of August (a downward correction of 37% since 12th June) has brought back to the fore the inherent weaknesses in China's current economic development. The country's decreasing growth to 7% over the first six months of the year (with an annual forecast of 6.7% for 2015 according to the OECD), thereby falling to its lowest level since 2009, is indeed a source of concern with regards to its impact on global growth as well as its short and midterm consequences for China's main trading partners, primarily the European Union, the United States and Asia.
Some observers believe that the country might even fall into recession if its GDP growth were to drop down to 3% or 4%. Others envisage a crisis scenario, pointing out a loss of credibility of the Chinese government and expressing real doubts over its ability to engage into fully effective measures to successfully manage the country's vital economic transition, including reforming notably state-owned enterprises.
But the Chinese economy still retains many assets favourable to managing the necessary transition towards greater consumption as well as promoting future growth. This is further supported by significant foreign exchange reserves despite recent capital outflows. [...]
We should expect the issue of China's soft landing to continue to weigh for some time on global growth. China has indeed entered a second phase of economic transition. The key issue is: can China sustain stable growth sufficient to allow the increasing income levels necessary for the development of a continent size consumer society? China's ability to solve the structural aspects of managing a smooth re-adjustment of its economy will therefore be decisive for its future and also for the interests of its European commercial partners.
This more difficult environment should remind us how urgent it is for Europe to re-double the structural reforms necessary to make the single market more complete and competitive, to maximise European employment and higher growth internally. We must hope that the member states of the European Union can rise to the challenge of China's transformation by making full use of the current period of low interest rates and the lower raw materials prices due to the Chinese slowdown, to transform it from a risk into an opportunity and secure the more solid cohesion and strategic control that alone will maximise their wealth creating potential and strengths.
Full publication on Fondation Robert Schuman