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China not slowing for businesses

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A number of media have suggested that the current restructuring in
China will come at the cost of faster economic growth. But in reality,
we are seeing an acceleration of business results for international
companies operating in China.

It therefore seems timely to review what are often referred to
“slower growth data” in order to understand their meaning for our
businesses.

While it is true that China’s real GDP growth is no longer in the
double digits and that it is likely to decrease from 7.8 percent this
year to 7.2 percent in 2015, GDP as an economic measure does not fully
reflect China’s business potential for foreign companies.

Indeed, what matters to companies doing or intending to do business
in China is the amount of GDP the economy will be adding in terms of
euros, US dollars or Swiss francs.

One must first look at how much GDP the Chinese economy is projected
to add in the future and compare it with past performance. To get a
global picture, it is also useful to compare this absolute increase with
the amount of GDP growth generated by other countries in their home
currency values.

As with every other country, China’s real GDP is reported as the
added growth in economic value in the Chinese yuan, minus local
inflation. This growth rate makes complete sense inasmuch as it captures
the real economic progress that  the country is making with respect to
its previous year’s performance.

That said, companies throughout the world report their growth in
their local currencies, without deducting inflation from their
performance results. They measure a country’s market potential in
absolute volumes (millions or billions of dollars) and not in growth
percentages. 

To illustrate this, take the case of  Mongolia. With a 2013 real GDP
growth rate of 12.5 percent, Mongolia is considered by the International
Monetary Fund to be “one of the fastest growing economies of the
world.” This growth, however, is based on 2012 GDP of about US$10
billion. Taking inflation (of about 10 percent) and currency devaluation
(of about 27 percent) into consideration, Mongolia last year added only
slightly more than US$1 billion to its economy. By comparison, the US,
which only grew by 1.9 percent in the same year, added approximately
US$500 billion to its GDP.

Absolute growth

Ultimately, when managing a company, the absolute growth of a market
is the most useful figure in evaluating  how much more business can be
generated in the future. From this business point of view, it is
striking to note that the Chinese market is actually growing faster than
it ever has.

Even though China is projected to grow by only 7.2 percent in 2015,
it will likely add more GDP in US dollar terms than it did in each of
years 2012-14, when GDP growth was higher. Indeed, should China sustain
constant percentage growth rates, its GDP would increase exponentially.

As it stands, however, even with slowing percentage growth, China’s
GDP will carry on accelerating, though not exponentially. Ultimately, it
is this continuous acceleration in absolute GDP growth that has an
impact on businesses potential.

Between 2011 and 2015, China is expected to add more than US$5
trillion to its GDP, compared with US$4.7 trillion in the first decade
of the new millennium.  In terms of business opportunities and in US
dollar terms, this means that China is growing, on average, twice as
fast today as it did in the previous decade.

By adding about US$1 trillion more per year to its GDP, China has by far the greatest business growth potential in the world.

In 2013 alone, business opportunities in China were twice as large as
the in the US, which is the second-biggest growth market in absolute
terms.

This acceleration in business potential was confirmed by the initial
results of a survey that we will be co-releasing in a month or two. It
will show that sales,  profits and worldwide shares of sales for foreign
companies in China grew faster in 2013 than in 2012 and are generally
expected to grow even higher in 2014.

What are implications for businesses can we draw and how can we benefit from these trends?

The first conclusion we reach is that international companies may not
be ambitious enough in China. If denominated in US dollar terms,
business in China should have grown by 13.4 percent only to keep up with
market growth, without gaining any market share. This figure is
obtained by taking 7.7 percent growth, plus 2.7 percent inflation, plus 3
percent currency appreciation. By comparison, business in the US would
have had to grow by only 3.4 percent, or 1.9 percent plus 1.5 percent
inflation to keep up with US market growth.

For those measuring China’s GDP in  euros or Swiss francs, there is a
2-3 percent difference that must be accounted for, which would bring
average market growth in China to 11 percent.

In 2014, the minimum rate of business growth necessary to keep up
with China’s growing market will stand at approximately 11.3 percent in
US dollar terms. This figure takes into account an expected inflation
rate of 3.5 percent and a steady US dollar-Chinese yuan exchange rate.

Private sector

Another important point to keep in mind is that the expected growth
will come more from the private than the state-owned sector. Indeed, the
Chinese government will be providing incentives to the private sector
to increase  domestic consumption and raise productivity.

While an increasingly privatized Chinese market with greater domestic
consumption will be a welcome development for the world economy, it
also means that competition in China will intensify. Local market
players will therefore have to become more efficient and resourceful.

In fact, initial results from our survey point to the fact that
international companies in China perceive local players as their
greatest competitors. This is a marked shift from the past, when they
viewed international rivals as their greatest threat.

Harnessing the productive potential of technology will be a crucial
step. Indeed, for companies to improve internal efficiency, it will be
essential for them to implement greater automation — using more
automated machinery to  produce goods or using better software and IT
systems to improve business processes.

In the context of such a competitive Chinese environment, being
successful will also mean having the right mix of imported and locally
developed products, equipment and IT.

China Integrated Co provides services for the set-up, acquisition and
development of businesses in China. The opinions are his own.

2016-06-24

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