Since late August, China’s economy and stock prices have dominated headlines worldwide.

Chinese stocks plummeted about 30 percent over the course of a week in late August, affecting bourses around the world. Investors, brokers and strategists hold a poor outlook for China’s economy, something that will likely be a major topic of discussion during the Annual Meeting of the New Champions, dubbed “Summer Davos,” in Dalian.

However, a plunge in stock prices and slumping capital investment and consumption are “growing pains” for China, which, as Chinese President Xi Jinping said, is entering a state of “new normal.” Considering China’s huge economic potential, Japanese companies should not panic and make a hasty decision of withdrawing or scaling down their Chinese operations, economists have said.

The new normal is China’s economic state of maintaining a growth rate of around 7 percent. It is expected that China’s economic growth will dip under 7 percent this year.

“OK, GDP growth may not be 7 percent this year. So what? 5 or 6 percent would still be very substantial growth,” said Zhou Muzhi, a professor in the Faculty of Economics at Tokyo Keizai University. “Do Japanese companies still have a chance to succeed in China? Yes. Do more and more Chinese come to Japan for binge shopping? Maybe not in the short term, but they definitely will in the long term.”

China’s growth rate peaked at over 12 percent on a quarterly basis in 2010 following the global recession in 2009. But it began consistently falling and has hovered roughly between 7 and 8 percent since the middle of 2012. This year, the growth rates for the first two quarters from January were 7 percent each.

To back up Zhou’s argument that 5 or 6 percent growth is substantial, the estimated growth rates for Japan, the U.S. and the eurozone for this year are 1.1, 2.7 and 1.5 percent respectively, according to the Global Economic Prospects June 2015 Edition by the World Bank.

To achieve new normal, China needs to become a “normal” economy by international standards. Xi knows it and is aggressively taking measures to eradicate corruption and reform national companies.

Such measures are partially blamed for the economic downturn because eradication of corruption reduced consumption of luxury goods and reforming national companies increased bankruptcies.

Still, “this is a good thing in the long run,” Zhou said, praising Xi. These moves work favorably to foreign companies, including Japanese ones operating in China, he added.

Shinichi Seki, vice senior economist in the Economics Department at The Japan Research Institute Ltd., also mirrors Zhou’s praise for Xi and his new normal policies. He also believes China still has major economic growth potential, but the world’s most populous country has a risk of going through stagnation in the short term.

The biggest problem is an excessive amount of debt in local governments and companies, Seki said.

“China is now in a situation similar to Japan’s right before the burst of bubble economy (in the early ’90s),” he said.

Capital investment has been declining constantly even with aggressive monetary easing as companies don’t know what to do with excessive amounts of cash except to use it to buy stock or other financial products, he added.

“When companies with huge debts start cleaning their balance sheets, they reduce capital spending and the economy will stagnate more and more,” he said, adding that this would follow the same pattern as the bursting of Japan’s bubble in the early 1990s.

Amid these economic conditions — even though economists were predicting the slump would be short-lived and necessary for future reform — it is fair to say investors overreacted.

The Shanghai Composite Index, the benchmark index for Chinese stocks, floated around 4,000 points in mid-August and fell to around 2,927.29 on Aug. 26. It had hovered around 3,000 until Sept. 4. From a peak at 5,166.35 on June 12, the index plunged about 42 percent.

Both Zhou and Seki agree that stock prices were excessively overvalued.

“In my mind, exceeding 4,000 points was dangerous territory,” Seki said. “Company earnings were getting worse and stock prices kept going up only because there was nowhere else for the money to go.”

Chinese market overreaction spread to the world and Japan’s stock prices also plunged. The Nikkei 225 Stock Average dropped to 17,806.7 on Aug. 25, down from 20,620.26 on Aug. 17, and had hovered in the range between 17,600 and 19,200 until Sept. 4.

The negative impact on the Japanese economy may be short lived, but it will definitely be felt.

Japanese makers of factory equipment and electrical components may experience sales drops in China, Seki said. Additionally, the number of Chinese tourists to Japan or the amount of money they spend may decrease.

Numbers of Chinese tourists have increased dramatically over the past couple of years because of various factors such as increasing Chinese wealth, the Tokyo Olympics in 2020, the designation of washoku Japanese food, as a UNESCO Intangible Cultural Heritage and the Japanese government’s efforts to promote Cool Japan.

Another risk is that investors may sell assets in yuan and buy them in other currencies too quickly, causing the yen to rapidly appreciate against the yuan, Seki said.

On China’s recent move in mid-August to reverse its currency policy from promoting a strong yuan to weakening the yuan, Seki said it is probably because China wants to dodge accusations of manipulating the currency market to keep the yuan strong. He also said the secondary reason is probably that China wants to help exporters.

In this situation, what should Japanese companies do? For example, major Japanese department stores, such as Mitsukoshi, Takashimaya and Isetan, have seen huge increases in sales from Chinese tourists over the past year. To accommodate them, they have increased their numbers of Chinese-speaking employees, put up more signs in Chinese and stockpiled products favored by Chinese. Should they continue to do these things?

Both Seki and Zhou said yes and agreed that Japanese companies should never stop taking such measures.

The two economists said Japan is still a minor destination for Chinese tourists and overseas travel itself is a minor entertainment option for them. As they become wealthier, overseas travel will become more and more popular, they said.

Zhou pointed out that more than 10 percent of people in Taiwan and Hong Kong have come to Japan, but less than 1 percent of Chinese have. As Chinese get to know the quality of Japan, they will visit and tell their friends about it, he added.

“Therefore, Japanese department stores and the tourism industry as a whole should continue to strengthen hospitality geared toward Chinese,” Zhou said.

Both Seki and Zhou believe China is on course to become a mature economy, amid new normal policies, and thus what people spend money on will shift from home appliances, cars and other hardware to entertainment and a more comfortable standard of living.

Given such a situation, Japanese makers may want to withdraw or scale down their manufacturing operations in China, and Japanese service companies may have a chance to succeed if they provide desired services, such as online shopping, Seki said.

Zhou said restaurants, hair salons and other life and culture-related industries will see increased demand in China, and Japanese companies have opportunities there.

Demand for extreme luxury goods and services may not increase now because they do not fit what the new normal is aiming for, Seki said.

Japanese carmakers will probably succeed because Chinese demand will shift from large, expensive cars to safe, easy-to-drive cars, something Japanese carmakers excel at producing.

Zhou said manufactures still have a chance to succeed if they focus on service. For example, Hitachi group is making a great deal of money in its elevator business, and Chinese people choose Hitachi instead of domestic makers because Hitachi has better maintenance services, he said.

“Not every manufacturer will slump in China. Japanese companies must become smarter as Chinese consumers will become smarter,” Zhou said.

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