It seems every other day or so, another shoe drops in China that sends the world market into tailspin. What the heck is going on there?

In 2008, the US was hit by the worst financial crisis since the Great Depression. Between 2008 and 2013, US industrial production contracted about 5%, Japan and Europe did even worse, they were down more than 10%. But China’s industrial production more than doubled during those five years. By 2013, it was 30% larger than that of the US.

What give? Alas there was a stimulus package in China (with borrowed and printed money) to build high speed rails, airports, metros, ports, and more than a few ghost towns. This infrastructure building binge created a massive but artificial demand, while growing government debt to 280% of GDP.

For a time, it was almost magical. China was growing by 10% while other countries were in recession and China was credited with saving the world economy.

But this growth model is not sustainable: there are only so many ghost towns you can build before running out of ghosts. So starting about 3 years ago, China scrambled to find a new growth model that is based on domestic consumer demand (as opposed to export,) services (as opposed to manufacturing,) innovations and entrepreneurship (as opposed to government command and control.)

Judging by anecdotal evidences and my personal experience, they are making good progress:

• Movie theaters are growing like 50% a year. Box office revenue is about to surpass that of the US.
• Apple is selling as many iPhone in China as in the US; GM is actually selling more cars there.
• In the first 20 years since I immigrated to the US, I did not consume any Chinese entertainment. Lately however, Chinese TV programming and movie making have improved so much, I began to watch them.
• In the first 20 years since I came to the US, I did not buy any Chinese branded or designed products. Lately, I bought a DJI camera drone. The DJI drone is the first time in modern history, a Chinese company started a whole new consumer category.
• Outside of the US, China now boasts the most number of billion dollar startups.

At the same time, industrial production is not growing, or may even be shrinking. This is a very healthy development. In fact, if its industry were to grow as it was a few years back, it would grow a UK every other year. Just imagine how many more ghost towns it would have to build just to absorb the added capacity. So not all slowdowns are bad. In this instance, the slowdown is much needed.

How is this transition gonna affect the world economy? Well, it’s gonna hurt resource economies like Saudi, Russia, Australia and Brazil. But it’s gonna help advanced products and services economies like UK, Japan and the US. Did I mention the US is capturing 40% of all box office revenue in China?

What about the out of control government debt? Most of the debt was borrowing by local governments and state firms from state banks. It’s basically the right hand borrowing from the left hand. Worst come to worst, there is always an accounting solution. The market is gone crazy worrying about China’s problems, you don’t have to.

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