CHINA GROWTH SEEN SLOWING SHARPLY OVER DECADE / THE WALL STREET JOURNAL

China Growth Seen Slowing Sharply Over Decade

Conference Board Report Sees Productivity Plummet, Leaders at a Loss

By Bob Davis

Oct. 20, 2014 12:09 a.m. ET

BEIJING—China’s growth will slow sharply during the coming decade to 3.9% as its productivity nose dives and the country’s leaders fail to push through tough measures to remake the economy, according to a report expected to come out Monday.

Such an outcome could batter an already fragile global recovery. But the report by the business-research group the Conference Board also finds that multinational companies in China would benefit. Lean times would give foreign firms more local talent to choose from.

Foreign companies and investors could also expect “more hospitable” treatment from Communist Party and government officials and a wider selection of Chinese firms they could acquire, according to the report, which was shared with The Wall Street Journal.

Foreign companies should realize that China is in “a long, slow fall in economic growth,” the report said. “The competitive game has changed from one of investment-driven expansion to one of fighting for market share.”

Officials representing China’s State Council, or cabinet, referred questions to its National Bureau of Statistics, which didn’t respond. Senior officials of the Communist Party are gathering in Beijing for a major policy meeting that opens Monday and is expected to discuss the slowdown.

The Conference Board forecasts that China’s annual growth will slow to an average of 5.5% between 2015 and 2019, compared with last year’s 7.7%. It will downshift further to an average of 3.9% between 2020 and 2025, according to the report.

China is scheduled to report its third-quarter economic growth on Tuesday.

The outlook for the world’s second-largest economy is one of the most important factors affecting the global economy. For the 30 years through 2011, China grew at an average annual rate of 10.2%, a record unmatched by any major nation since at least World War II.

That growth lifted hundreds of millions of Chinese out of poverty and turned the country into a major market for commodity producers in Asia, Latin America and the Middle East, and consumer and capital-goods makers from the U.S., Europe and Japan.

Since 2012, China’s GDP growth has decelerated. Economists say Chinese leaders will struggle this year to meet their growth target of 7.5%.

The New York-based Conference Board argues that productivity in China is declining, in part because investments in infrastructure and real estate don’t have the payoff they once did. Meanwhile, government and Communist Party officials who don’t give market forces a large-enough role are stifling innovation.

“The state is too present in the market,” said David Hoffman, managing director of the Conference Board’s China center.

China has kicked off its fourth plenum, a major four-day Communist party summit. WSJ's Ramy Inocencio talks to Cheung Kong Graduate School of Business professor Li Wei on what to expect.

The report says that China could ease the slowdown by reducing the role of the state and revamping credit markets so lending is done on the basis of commercial decisions rather than political ones. But the Conference Board is skeptical that China will make fundamental changes soon because they could slow short-term growth and cause political pain.

Nicholas Lardy, a China expert at the Peterson Institute for International Economics, said the Conference Board conclusions are too gloomy. “China is far from exhausting productivity gains,” he said. It would get a big lift, for instance, from opening for competition the oil, gas and other sectors dominated now by China’s big state-owned firms, he said.

The International Monetary Fund and World Bank also expect China’s economy to slow over the coming years, but at a more modest clip. The Conference Board forecasts are “eye-popping,” said David Dollar, a China scholar at the Brookings Institution who formerly ran the World Bank’s office in China.

He called the report “a pessimistic take on whether China will aggressively pursue structural reforms.” Given the Conference Board’s main audience—its membership includes 2,500 of the world’s largest companies—the report is likely to spark a debate about the direction of the Chinese economy and the leaders’ commitment to change.

Multinational firms should be able to weather a period of much slower growth better than their Chinese competitors, the Conference Board report said, because foreign firms are used to managing their business during recessions and expansions. Chinese firms have known only heady economic growth, it said.

The slowdown will also create opportunities for foreign firms, as China realizes it needs foreign capital and technology and better access to overseas markets.

Foreign firms will need to be savvy, though, to make sure they don’t enter deals that wind up giving away important intellectual property as they did in the past, the report says.

Chinese leaders say they remain committed to revamping the economy. “Just like an arrow shot, there will be no turning back,” Chinese Premier Li Keqiang told a session of the World Economic Forum in the Chinese city of Tianjin in September.