China's Growing Pains

It was easy to run a profitable outfit when the Chinese economy was booming. Double-digit GDP growth, combined with strong demand for cheap Chinese exports fueled a tidal wave of successful startups. Investors shoveled tremendous amounts of capital into these young companies, but many were more concerned with “getting into China” than with investing in a particular company. As a result, many companies that would not have been financed during low-growth periods were given a shot.

Then came the downturn. Exports plunged, and thousands of Chinese manufacturing plants were shuttered. China’s economic slowdown has made headlines across the world, but in the long-term, is it really such a bad thing?

The combination of China’s phenomenal growth and an abundance of capital meant that inefficient companies were allowed to grow. The recent round of business closures could serve as a sort of forest fire that clears the dead wood out of the Chinese market. The companies that survive must be more efficient, and will accordingly gain market share, and serve their customers in a more efficient manner.

To be sure, the slowdown in growth is creating a very real and very difficult situation for the Chinese economy. But there will be a recovery, and wouldn’t it be best to have stronger, leaner companies leading this recovery? In the long-term, these growing pains may be just what the Middle Kingdom needs to emerge as a stronger, leaner, economic superpower.