Mainland China: Empowering sustainable growth
After years of near-double-digit growth,1 mainland China’s expansion remains the envy of most nations. Now, as it turns towards a sustainable growth model underpinned by the new economy sector,2 domestic demand and regional cross-border trade, the opportunities afforded to local mid-corporate companies are considerable.
In the wake of the global financial crisis of 2008, mainland China made a conscious effort to rebalance its economy, leading to a focus on services and domestic consumption, and helping fuel the economy’s continued growth in the turbulent years following the downturn.3 Now, the mainland is dealing with a fresh challenge – the coronavirus outbreak which could disrupt supply chains, shut down factories on the mainland and hit overall growth. The government has introduced stimulus measures, including interest rate cuts,4 to offset the impact of this near-term challenge to the economy. The government has also reaffirmed its commitments to meet its development targets for 2020.5
As mainland China looks ahead to a new decade, it grew at 6.1 per cent in 2019 – in the midst of an uncertain global economic environment – and significantly higher than the projected global real GDP growth of 2.9 per cent.6 The relatively lower yet healthy growth rate offers a range of opportunities – aided by focused government initiatives aimed at helping companies tide over short-term hurdles and capitalise on long-term growth potential – especially in mainland China’s famed manufacturing sector and the rapidly expanding e-commerce space.
New challenges, new market realities
Among the near-term challenges are a weakening global economy and the ongoing trade negotiations with United States. These are affecting mainland China’s manufacturing sector at a time when labour shortages and wage increases are adding to operational costs and pinching profit margins.
To cope with these issues, mainland Chinese mid-corporates are expanding their production locations to lower-cost destinations in Asia. As this trend, representative of maturing sectors and economic cycles, accelerates the transformation of long-established supply chains,7 the government is expediting reforms, easing restrictions and offering incentives to encourage new entrants.8
Mainland China’s e-commerce sector – the engine of growth for its new economy industries, which are typically more focused on technology and online consumer services than older, capital-intensive industries9 – is also undergoing significant changes.
As the mainland’s urban middle class grows wealthier10 and people’s buying power grows, they are becoming more discerning and demanding in terms of product and service quality, and indeed the entire customer experience across platforms. This is driving e-commerce mid-corporates to adapt their operations accordingly. For instance, Shenzhen Zhongxing E-Commerce is setting up its “own warehouses in destination markets to improve the customer experience,” according to co-founder Shaoqing Li.
The use of technology, such as chatbots and artificial intelligence (AI), designed to enhance a customer’s overall shopping experience, is also becoming more prevalent. This typically entails enhancing investments in research and development to make innovative products that compete on quality rather than price, as well as introducing features to better engage with customers online.
Rich pickings
Even as the business environment gets more competitive amid long-term trends such as technological advancements,11 and ongoing market reforms such as the creation of more free trade zones,12 there is massive growth potential for domestic mid-corporates in both manufacturing and e-commerce sectors to capitalise on.
Mid-corporates producing high-value products stand to gain the most from the government’s ambitious plans to lift the country’s manufacturing sector up the value chain.
From robotics to aerospace to new energy vehicles, China is aiming to reduce its reliance on high-tech imports, encourage the local production of such products and become a leading player in high-value manufacturing..13 Meanwhile, the government is considering proposals by industry bodies to enhance financing for innovative small and mid-sized businesses as part of its structural reforms programme to drive the next phase of growth.14
The Association of South East Asian Nations (ASEAN) bloc, which was the second fastest-growing destination for mainland Chinese high-tech exports in 2017, remains a promising market for its high-tech manufacturing exports such as semiconductor chips. The rise of manufacturing hubs such as Shenzhen will also add to the growing opportunities in this segment, especially in the medical equipment and devices (medtech) sub-sector, as mainland China’s population ages.
Mainland China surpassed the United States as the global leader in e-commerce and mobile payments in 2015. And, by 2022, the mainland’s online retail market is projected to be worth USD1.8 trillion,15 or twice that of the United States, underscoring the growth scope for mid-corporates. In addition, the growing importance of China’s lower-tier cities as they gradually adapt to online shopping signals a market ripe with opportunity.
Abroad, the growth of e-commerce in South Asia has emerged as a strong opportunity, with several large companies already targeting India through investments in local players (Alibaba with Paytm16 and Zomato and Tencent with Swiggy17). Similarly, as incomes and internet penetration slowly expand in markets like Sri Lanka, Pakistan and Bangladesh, they too will eventually present opportunities in the long term.
Hence, it’s not surprising when Li of Shenzhen Zhongxing E-Commerce notes that his company plans “to set up office teams in many overseas countries to better fit product recommendations to the local markets and develop sales, especially in expanding markets such as India, growing at a CAGR of more than 30 per cent.”
Opportunity in adversity
Despite moderating growth, mainland China could add over USD900 billion to its economy this year,18 underlining its resilience and capacity to external shocks. Its rapid pace of urbanisation and a growing middle class – now 200 to 300 million strong, with a total spending power estimated to be over USD28 trillion19 – is expected to drive up domestic consumption.
In the years to come, a combination of government initiatives and private enterprise should create opportunities for mid-corporates in both manufacturing and e-commerce – the linchpins of growth in the old and new economies, respectively. As mainland China continues to make strides in opening up its economy,20 and welcoming foreign investors and capital to its shores, these efforts of reinvention will ultimately help insulate the country from growing external risks, and help secure for itself a strong future in the face of adversity.
1 opens in a new windowhttps://www.wto.org/english/thewto_e/acc_e/s7lu_e.pdf
2 https://www.scmp.com/business/companies/article/2124979/chinas-new-economy-grows-twice-fast-gdp-and-helps-offset-job
3 https://www.china-briefing.com/news/china-gdp-growth-making-sense-data-available/
4 https://www.scmp.com/economy/china-economy/article/3065037/coronavirus-china-set-follow-global-interest-rate-cuts-offset
5 https://www.scmp.com/economy/china-economy/article/3052088/coronavirus-china-pledges-hit-2020-targets-despite-economic
6 PwC Report; Global Economic Outlook Report, 2020 – World GDP Growth to Pick Up from 2.9 per cent in 2019 to 3.2 per cent in 2020, Driven by Stronger Growth in Emerging Markets
7 https://www.scmp.com/economy/china-economy/article/3007334/trade-war-forcing-93-cent-chinese-companies-transform-supply
8 https://asia.nikkei.com/Economy/Trade-war/China-scrambles-to-stem-manufacturing-exodus-as-50-companies-leave
9 https://www.asianinvestor.net/article/finding-investment-opportunities-in-chinas-new-economy/452444
10 https://www.mckinsey.com/featured-insights/china/the-value-of-emerging-middle-class-in-china
11 https://www.mckinsey.com/featured-insights/china/three-long-term-trends-changing-business-in-china
12 https://www.china-briefing.com/news/economic-reform-china-opening-up-future-prospects/
13 https://www.scmp.com/business/china-business/article/2163601/made-china-2025-beijings-plan-hi-tech-dominance-big-threat
14 https://www.reuters.com/article/us-china-economy-report/china-needs-to-change-way-it-finances-economy-think-tank-says-idUSKBN1W709C
15 PwC Report; Medici Research ‘Mobile Payments: Comparison of Two Powerhouses of the World’, June 2019
16 https://www.reuters.com/article/us-softbank-group-paytmecommerce-stake/softbank-alibaba-to-invest-445-million-in-indias-paytm-e-commerce-idUSKCN1H91NS
17 https://www.bloomberg.com/news/articles/2018-12-20/tencent-joins-naspers-in-a-1-billion-funding-for-india-s-swiggy
18 PwC Report, WorldBank Databank, ‘China’, 2018; Country Economy, ‘China GDP’, 2019; South China Morning Post, ‘Why there’s no reason to be bearish about China’s Slowing Economy’, August 2019
19 https://www.weforum.org/agenda/2019/04/china-s-decade-of-sweeping-economic-change
20 https://www.reuters.com/article/us-usa-trade-china-companies/china-says-will-open-more-sectors-of-economy-to-foreign-investors-idUSKBN1WE08H