LETTER FROM CHINA: A changing China holds scope for global companies
by Kobus van der Wath,
2014-02-27 05:44:32.0
AS CHINA faces a broad range of challenges, the shifting structure of its economy and the development of its "soft power" are stand-out issues for this year. The consequences of how Beijing deals with such challenges will affect companies across the world and executives should be prepared for any opportunities that may arise.
Although China is still expected to grow at about 7.5% this year, many analysts have suggested that such a relative slowdown will encourage Beijing to address chronic issues such as social inequality and the economy’s dependence on investment for growth. But with the global economy still recovering from the financial crisis, these transitions will test Beijing’s credentials.
China’s attempt to shift its economy towards a stable but consumption-driven one, with greater social and geographical equality as well as environmental sustainability, could define its long-term political and economic future.
Inequality presents one of the gravest threats to China as the country’s growth thus far has been constrained to its eastern provinces. While the Chinese Communist Party has been prioritising economic development in western China for some time through the "Go West" policy, it has reaffirmed and strengthened that position since late 2012.
The National Development and Reform Commission has announced that more than 40% of its large-scale infrastructure projects will be in western China and that it expects the region to take an even larger role in the future. Comparing economic growth in western provinces to the rest of the country will provide a key indicator of the progress Beijing is making in reducing inequality.
China’s transition to a consumption-driven economy will result in an expansion of its service sector and an increase in the average household disposable income. While the service sector’s contribution towards China’s economy was slightly underwhelming in the fourth quarter of last year, it has been consistently growing faster than the industrial and agricultural sectors over the past decade. Consequently, many observers still expect the service sector to contribute an increasing amount to China’s gross domestic product (GDP).
Enticing consumption in a country where there is a cultural predisposition towards saving will take some effort. However, with 10% annual growth in retail sales over the past decade, momentum is there and efforts to sustain it will be crucial in expanding the service sector.
Beijing’s efforts to raise living standards and the rate of consumption have seen wages increase by a compound annual growth rate of more than 14% since 2007. While this trend bodes well for workers and, in turn, consumers, managers must adapt to ensure that their company remains competitive. Greater product innovation is necessary to move up the manufacturing value chain and complexity spectrum.
Having recently overtaken Europe, China has been increasing spending on research and development as a percentage of GDP (currently 1.98%), and Beijing is targeting a 2.2% level by 2015.
China’s projection of "soft power" is also being put under strain for various reasons. Within Asia, China’s increasingly assertive claim of various islands in the South China Sea has drawn criticism from its neighbours. Framing its assertiveness in the global community will require elegance and political savvy to lessen the negative coverage it faces.
Many countries in Africa are crucial to China’s future security of resources. But it faces growing pressure to ensure that its legacy in Africa is different from that of traditional colonial powers.
As China increases its outward foreign direct investment, it must be conscious of the host countries’ calls for an improvement in working conditions and greater levels of domestic wealth transfer.
Similarly, Chinese companies wanting to expand into developed countries will have to overcome the prejudices many of those markets have of China’s products and services — cheap, but low-quality.
• Van der Wath is group MD of The Beijing Axis. He can be reached at [email protected]
AS CHINA faces a broad range of challenges, the shifting structure of its economy and the development of its "soft power" are stand-out issues for this year. The consequences of how Beijing deals with such challenges will affect companies across the world and executives should be prepared for any opportunities that may arise.
Although China is still expected to grow at about 7.5% this year, many analysts have suggested that such a relative slowdown will encourage Beijing to address chronic issues such as social inequality and the economy’s dependence on investment for growth. But with the global economy still recovering from the financial crisis, these transitions will test Beijing’s credentials.
China’s attempt to shift its economy towards a stable but consumption-driven one, with greater social and geographical equality as well as environmental sustainability, could define its long-term political and economic future.
Inequality presents one of the gravest threats to China as the country’s growth thus far has been constrained to its eastern provinces. While the Chinese Communist Party has been prioritising economic development in western China for some time through the "Go West" policy, it has reaffirmed and strengthened that position since late 2012.
The National Development and Reform Commission has announced that more than 40% of its large-scale infrastructure projects will be in western China and that it expects the region to take an even larger role in the future. Comparing economic growth in western provinces to the rest of the country will provide a key indicator of the progress Beijing is making in reducing inequality.
China’s transition to a consumption-driven economy will result in an expansion of its service sector and an increase in the average household disposable income. While the service sector’s contribution towards China’s economy was slightly underwhelming in the fourth quarter of last year, it has been consistently growing faster than the industrial and agricultural sectors over the past decade. Consequently, many observers still expect the service sector to contribute an increasing amount to China’s gross domestic product (GDP).
Enticing consumption in a country where there is a cultural predisposition towards saving will take some effort. However, with 10% annual growth in retail sales over the past decade, momentum is there and efforts to sustain it will be crucial in expanding the service sector.
Beijing’s efforts to raise living standards and the rate of consumption have seen wages increase by a compound annual growth rate of more than 14% since 2007. While this trend bodes well for workers and, in turn, consumers, managers must adapt to ensure that their company remains competitive. Greater product innovation is necessary to move up the manufacturing value chain and complexity spectrum.
Having recently overtaken Europe, China has been increasing spending on research and development as a percentage of GDP (currently 1.98%), and Beijing is targeting a 2.2% level by 2015.
China’s projection of "soft power" is also being put under strain for various reasons. Within Asia, China’s increasingly assertive claim of various islands in the South China Sea has drawn criticism from its neighbours. Framing its assertiveness in the global community will require elegance and political savvy to lessen the negative coverage it faces.
Many countries in Africa are crucial to China’s future security of resources. But it faces growing pressure to ensure that its legacy in Africa is different from that of traditional colonial powers.
As China increases its outward foreign direct investment, it must be conscious of the host countries’ calls for an improvement in working conditions and greater levels of domestic wealth transfer.
Similarly, Chinese companies wanting to expand into developed countries will have to overcome the prejudices many of those markets have of China’s products and services — cheap, but low-quality.
• Van der Wath is group MD of The Beijing Axis. He can be reached at [email protected]
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