ADAPTING TO CHINA’S REALITY CHECK

Amid deepening concerns about China’s woes, top business leaders, China policy watchers, and other experts gathered on September 1st at AmCham’s annual China Conference themed Managing the “New Normal” – to exchange ideas and strategies about how best to navigate through these new realities. Many industry experts remain optimistic about the Mainland’s growth potential and business opportunities despite the tectonic shifts the nation is undergoing

By Nan-Hie-In


After three decades of tremendous growth, the world’s second largest economy has become such an omnipotent economic force that many companies, locally and internationally, have orientated their business models around China to take advantage of the momentum. But such levels of growth cannot be sustained forever.

While many observers have antici­pated a slowdown, few could have foreseen the dramatic turn to pessi­mism in recent months in light of China’s stock market routs, currency devaluation, and other discouraging events that have intensified concerns about China’s woes. Goldman Sachs, for example, recently lowered its China GDP estimates for the next three years to 6.4 percent, 6.1 percent and 5.8 percent respectively, figures that are below the government’s forecast at seven percent for 2015.

Christopher Johnson, the keynote speaker at China Conference 2015, framed this new reality specifically: “There is the new normal [China’s leader] Xi Jinping has described of slower and more balanced growth, but I think this sets off a whole range of “new normals” which are coming out.”

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Johnson, who is senior adviser and Freeman Chair in China studies at the Center for Strategic and International Studies (CSIS), defined several of these “normals.” First, the difficulties China is experiencing politically and economically amount to increased pressure on the leadership, which results to increased jockeying and infighting. “The atmosphere resem­bles what we saw in the 1980s, the last time we saw big wrenching change inside the system,” he says. “Expect further turbulence in the country’s leadership, which will be spilled out in editorials or other commentary shared publically.”

Johnson says to expect a strength­ening role of the Communist Party, with its increasing involvement in just about everything in China, as evidenced recently from Beijing’s heavy-handed measures to stem the free fall of the Chinese bourses. This is a significant shift in Xi Jinping’s reliance on the nation’s formal institu­tions of governance, including the State Council side, Johnson says. In the past, decisions flowed through a distinct organizational order. “Xi Jinping feels that the former era was full of hyper consultation but no action, but he considers himself a man of action.”

This practice has stirred up confu­sion and uncoordinated actions between organizations, which leads to another new normal in China – mixed policy messages. “This makes it difficult for the markets, as you try to understand where the government is going,” Johnson says.

New strategies

(From left) Victor Fung, John Rice, Honson To and moderator Tara Joseph
(From left) Victor Fung, John Rice, Honson To and moderator Tara Joseph

A pressing concern among many businesses is how best to adjust their growth models amid China’s new reality. Three top business leaders – Victor Fung, John Rice, and Honson To – addressed these concerns in the conference’s opening panel.

Fung, Group Chairman of the Fung Group, is particularly drawn to the nation’s shift towards a consumer-driven economy.

Since the Deng Xiaoping era when China opened up to the rest of the world, the nation became a popular base for low-cost production of consumer goods amid complex global supply chains. The Mainland’s growth strategy was driven by global consumption, especially in OECD countries. According to Fung, at the height of this wave up until 2008, around 83 percent of global consump­tion was from these countries.

However, major shifts have occurred recently as consumption increasingly comes from non-OECD developing nations. “The biggest question facing global firms is to find out where this consumption is going and to take advantage of it.”

Fung suggests paying close atten­tion to China’s One Belt, One Road (OBOR) initiative, which revives the Silk Road trade routes by land and sea and treads together many developing markets. “If you want access to this new consumption, the OBOR, especially the Maritime Silk Route Economic Belt, is going to capture that,” he says.

Change 8John Rice, Vice Chairman of General Electric, concurs. “In the last 20 to 30 years, we have seen an evolu­tion in China where we have gone from showing up to sell, to showing up to make [goods] and to sell, to showing up to make [goods] and to sell and also find partners,” he says. This pattern is in sync with the OBOR project, where much interest is focused on the Chinese government’s collaboration with multinational companies for successful operations outside of China.

“They’re not just looking for partner­ships and joint-ventures that allow a company like ours to do more in China, they are examining closely the value that we can help create with our Chinese partners that comes from businesses conducted someplace else,” he says.

“The creation of the Asia Infra­structure Investment Bank (AIIB) fits hand in glove with OBOR strategy and the world, and we all see infrastruc­ture investment that needs to take place in non-OECD countries,” says Rice. For instance, he forecasts particular growth in consumption in healthcare and clean water.

Fung emphasizes that innovation will be a key driver of new business models in the Mainland. “China is in the forefront of the revolution in terms of new technology as it is morphing not only from bricks-and-mortar alone but to bricks-and-clicks.” Fung says this shift is inevitable, yet no one can exactly define what that model will be. Expect much experimentation in China as these new models arise.

These shifts are related as well to more proactive consumers emerging in China – they are more knowledgeable, sophisticated, and also have deeper pockets, Fung says. “The sweet spot of consumers in most Western economies are always in the 45 to 55 years age bracket, but for China I think they are at least 10 years younger,” he says.

These consumers will become an important driver in China’s future growth as urbanization sweeps across the nation amid a growing middle class. A recent report this year by the Pew Research Center showed that China’s middle class has ballooned to 203 million in the 10 years since 2001.

The rise of entrepreneurism

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As China shifts away from its low cost labor strategy and export-driven economy, Honson To, Chairman, KPMG China, sees the rise of entre­preneurism in the Mainland as another growth engine.

He has observed significant shift compared to 20 years ago. “The quality of discussions I’ve had recently, especially with privately owned companies, included a quality of strategic foresight by CEOs and chair­men that certainly does not pale in comparison to [the conversations I’ve had] at established international companies,” he says.

Some of these business mavericks knowledgeably discussed their six- to seven-year investment plans or meticulously detailed strategies to capture market share. Although such a competitive and entrepreneurial spirit is evident across China, To says, not enough attention is being paid to this scene.

“In the past 30 years, the focus has mostly been on watching what the government is going to do and this is still important, but there is a force now rising from these entrepreneurs that must be watched carefully too,” he says. Foreign firms based in China should watch out for such competition.

However, this new strategy is not without risks as China has yet to foster an encouraging ecosystem for incubating and funding young, private enterprises. “There is no doubt that entrepreneurs in China have not had the easiest time in the past five to seven years, even though the govern­ment has indicated that the market is about to play a more exciting role for entrepreneurs,” says To. He cites the example of bank lending in China where existing policies still favor SOEs. He suggests that despite such obstacles this new generation of business mavericks will manage to persevere, citing the success stories of Tencent, Baidu, and Alibaba.

The optimism aired by these business leaders indicate that they are not swayed by the doomsayers about China’s outlook, as China is still performing better than many of the other economies. “People forget that with reform there is the tough stuff, and that much bad stuff comes before you get the good stuff,” says Rice. “I think the Chinese government saw the anti-corruption drive, SOE reforms, and environmental policies as all affecting its GDP.” The nation is trying to balance all these elements.

1Fung adds that nowadays Chinese citizens increasingly demand “non­economic assets” such as social equal­ity and improvements to the environ­ment, which have contributed to China’s current reality. “I find it striking that the leadership has started saying how China has entered an era where it is willing to accept a slower growth rate to accomplish these non-quantitative assets – that is the future.”

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