China's growth engine slowing down?

China enters a new era of growth

China´s historic high-growth model has started to slow down due to global economic environment and internal structural change. Chinese government came to realize that the past growth model can no longer be sustainable, while stable and qualitative growth will be the focus for years to come. 

China’s 12th five-year plan has set a new agenda for future economic development. The new leadership team is determined to steer the country to a different direction by changing the economic structure and introducing necessary reforms. China´s transformation naturally concerns many countries in global business perspective.

As Chinese Premier Li Keqiang spoke in the last World Economic Forum, China is entering a new phase of growth. In this new era, quality and efficiency improvement will be the main focus. China requires deeper reform and needs to seek for new fundamentals for driving future growth. Also more government controlled industries such as telecom, energy, financial services, infra-structure and public services, will be opened up to private.

“World factory’s” new positions in the global value chain

“Made in China” products can be seen all over the world, especially after China joined WTO in 2001. In recent years, Chinese government has, however, realized the cost of being “world factory”. The low-value-add position in the global supply chain has become a major challenge to China’s economic development.

Chinese government is introducing different policies to promote certain industries such as new energy, new materials, next generation IT and bio-tech. It is trying to upgrade its position in global supply chain. This means that China will play smaller role globally in some industries, which may create opportunities to other developing countries. One example is Bangladesh which surpassed India to become the second largest textile and apparels export country after China in 2011. The country had yearly production of approximately USD 20 billions and almost 5000 factories working for western brands. Bangladesh has already roughly 3 million female factory workers with 1/10 of the average salary paid in China.

On the other side of the coin, the once struggling U.S. manufacturing industry is being revived under Obama’s government. He introduced new policies and incentives to promote advanced manufacturing. “A strong manufacturing base in America is critical to the health of the U.S. economy.”, said Acting U.S. Commerce Secretary Rebecca Blank.

The trends of U.S. and Europe to revive manufacturing industry and shifting supply chain to their home market challenge China. This combined with low-cost manufacturing moving to South East Asian countries, have pushed China to a cross-road to rethink its role in global economy and to upgrade its industries.

Emerging urban middle class drives the domestic market

The domestic consumption in China is expected to increase in coming years due to the growing size of the middle class.

One sign of the increased power of consumption is tourism. According to China Tourism Development’s recent data, Chinese tourists travelling abroad have reached 83 million and spent 112 billion USD in 2012. This represents 18% increase in tourists and 40% year-on-year increase in spending. However, the domestic consumption represents merely 35% of total GDP composition at the moment compared to roughly 70% of other developed countries. As such, Chinese government will continue to improve domestic consumption environment and increase disposable income of average Chinese people.

International companies’ future in China

Market entry to China is a continuous process. A company’s China strategy requires frequent review, reshape and following the government’s guidelines. It is not a surprise that costs in China are going up and the local competition is becoming harder. Foreign companies can, however, still benefit from government´s incentives to expand to inland China, future Free Trade Zones and find opportunities from encouraged industries.

Companies expanding to China need to follow closely the new schemes and reforms in order to adjust their local operations accordingly. As China´s urbanization process continues, new investment opportunities are emerging for example in service and retail industries. It is, thus, even more critical for foreign companies to find the right location or partner to enter or penetrate to the market. And to make the most out of the future business opportunities in China.

Please, read also my previous blog ”The promising future is NOW in Brasil”.

Kelly_Luostarinen_100x100Kelly Luostarinen is a Director in T&R Strategy Group and Head of China Practice and Brazil Desk in KPMG Finland. She was born in China, raised up in Brazil and has been working in Finland for the past 13 years.

On her own time, Kelly enjoys reading, watching movies and spending time with her three Chartreux cats.