6 lessons on how to forecast China’s economy

From McKinsey’s China guru, Gordon Orr:

New Year forecasting is a widely practiced business art in most areas of the world, but in China it carries particular risks and rewards. Here are a few reflections to help leaders trying to plan ahead in this fast-changing land:

1. As long as you are directionally correct, growth in China will make your predictions right at some point, and often very quickly. Having a sense for the pace of change is critical.

2. Don’t rely too heavily on government statistics. In the past, at least, the government struggled to gather quality data, and what data it had were often heavily massaged.

3. Trying to forecast exactly when discontinuities will happen is a fool’s game. But identifying what types of discontinuities will happen is a fool’s game. But identifying what types of discontinuities could occur—and having a plan to deal with them if they do—is a basic corporate responsibility.

4. Volatility is a central feature of the Chinese economy. Consumers and businesses still overreact to signals to spend, to invest, and to cut back, so there will be unexpected jumps in demand—and setbacks. Don’t forecast in straight lines.

5. Economics is still economics in China. If something looks odd, it probably is. Find out why before you forecast (or invest).

6. It is more important for forecasting to be interesting—thereby encouraging debate, scenario planning, and a flexible mind-set—than comprehensive.

As for my own modest efforts, I’ve learned to live with the fact that public forecasts never disappear; people still circulate the old ones online. So I’m developing a thick skin, while trying to balance my role as provocateur with my desire to avoid saying something today that will embarrass me in years to come.