5 February 2016

Opportunities in China’s new normal

Helen Wong, Chief Executive, Greater China, HSBC
(This article was first published on 5 February by Hong Kong Economic Journal)

After decades of supercharged growth, China’s economy is now growing at a more moderate pace. But given its sheer size, even less-than-rapid growth generates plenty of opportunities for corporations that cater to the changing needs of the world’s second-largest economy.

China’s economic transformation over the past 35 years has been rapid, far-reaching and multi-faceted.

In 1978, the year before Beijing began to reform and open up the Chinese economy, the country was home to 22% of the world’s population, but was responsible for just 5% of the world’s economic output. By 2014, its share of the global population had slipped to 19%, but its share of global GDP had soared to 13%.

Over the same time, millions in China have left their farms for jobs in the city. While agriculture’s share of the economy has fallen from around 30% to less than 10%, that of services has doubled, topping 50% for the first time in 2015. Many of China’s 1.36 billion citizens have become wealthier as a result. As recently as 2000, only 4% of China’s urban households were considered middle class. By 2012, that share had soared to 68%.

These changes have brought tremendous opportunities for foreign businesses, which, in the decades after China opened up to global trade and investment, seized on China’s low-cost manufacturing prowess to source and manufacture goods for markets around the world.

China’s cooling growth has dulled that demand of late, but this does not mean business opportunities have dried up. The “new normal” in China means more realistic, sustainable expansion, where the emphasis is on the quality, rather than the sheer speed of growth. The goal is to reduce the old reliance on exports and low value-add manufacturing, and increase the role of domestic consumption, private-sector activity, and services, which now make up a bigger part of the economy than manufacturing.

While old-style manufacturing will not disappear, the government is making big efforts to move China’s manufacturing capabilities to the next level. Policies such as “Made in China 2025,” announced in May, promote advanced industries like IT, robotics, aerospace, railways, and electric vehicles. This presents opportunities for local and foreign businesses.

Take urbanisation. Despite the massive migration to cities over the past three decades, China’s urbanisation rate lags behind that of other countries at similar levels of development. The government’s target is to have 60% of China’s population living in cities by 2020. That means a continued, big need for investment in urban infrastructure – from subways, water treatment systems, and waste management facilities to building technologies and airports.

On the consumption front, the stars remain aligned for robust growth for many years to come. The days of double-digit economic growth may be over, but salaries are still rising. While consumer appetite for some goods or brands may have dropped off, a lot of cash is simply shifting to other product categories, or will be deployed a little later.

As Chinese consumers become wealthier, they will continue to buy iPhones, send their kids to universities in the West, and travel to Hong Hong, Paris or Tokyo.

The stock market volatility has not put a stop to consumer spending. Retail sales last year rose a robust 10.7% from a year earlier. And Alibaba’s sales on “Singles Day” last year soared to RMB 91.2 billion. That is up from RMB 36.2 billion just two years earlier, and far more than what shoppers in the U.S. spent during the multi-day sales spike around the Thanksgiving holiday.

Meanwhile, Beijing’s goal of boosting private-sector activity, growing the service sector and raising living standards will bring new business opportunities in sectors such as financial services and healthcare. Healthcare spending alone is estimated to grow to $1 trillion in 2020 from $357 billion in 2011, according to McKinsey – and the government has signaled that foreign investment will have a role to play.

China is not an easy market, and the days when companies could record easy, double-digit annual growth are over. Foreign companies doing business in China have to be nimble and be able to adapt to the constantly changing spending preferences of Chinese consumers. For those that do so, China will continue to be a must-be location and key export market.

Opportunities in China’s new normal (3-page PDF 83 KB)