Siah Hwee Ang on the latest happenings surrounding China, including the inevitable slowdown, a call for more investments and imports, keeping multinationals on their toes, the new e-commerce law and the new tech ambitions

This guest Top 5, replacing our Top 10s, comes from Professor Siah Hwee Ang, the BNZ chair in business in Asia who also chairs the enabling our Asia-Pacific trading nation distinctiveness theme at Victoria University. 

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

We are always keen to find new Top 5 contributors so if you're interested in contributing, contact gareth.vaughan@interest.co.nz.

1. China will slow down

What goes up has to come down eventually.

When China opened up to the world back in 1978, its economy was growing at 11.7%, compared to a global average of 4.0%.

In 2017, China’s growth slowed to 6.9%, while global economic growth stood at 3.0%.

The average world economic growth in the period from 1979 through to 2017 was 2.9%. In the same period, China’s average growth was a staggering 9.5%.

But, as the second largest economy by GDP, we should expect China’s figures to trend towards the global average as it strengthens its integral position in the world’s economy.

In 2018 alone, China’s GDP grew another 6.6% - representing a dollar value of US$1.18 trillion, the equivalent of Mexico’s GDP in 2017. Mexico is the world’s 15th largest economy. (See an earlier piece on the effects of such expansion on managing relationships with China.)

So, despite China’s attempts to allay fears surrounding a slowdown, the slowdown continues to be inevitable.

More recently, however, China expressed the view that it needs stable growth. As China’s Vice-President Wang Qishan said “Speed [of growth] does matter. But what matters more is the quality and efficiency of economic development”.

It remains true that a stable, growing China is healthy for the global economy in the mid to long term and that there is little cause for concern at this stage.

2. China wants more investment and imports

As though in response to the US’ claims around its trade imbalance, China is announcing to the world that it wants to have more investment and imports.

On the investment front, China is fast-tracking an investment law that will level the playing field for foreign enterprises in China.

One essential element is the elimination of the requirement for foreign enterprises to transfer proprietary technology to Chinese joint venture partners.

Such legislation is welcomed by foreign enterprises.

But the process itself is more of a worry as there was little consultation around how to implement the legislation fairly.

On the import front, over 3,600 companies from 172 countries and regions took part in China’s first International Import Expo (CIIE) in November 2018.

Around 200 of these companies were Fortune 500 companies.

Trillions of dollars in goods have been committed to be purchased by China over the next 15 years.

Foreign direct investment into China and China’s imports have been on the rise. But the numbers are by no means extraordinary compared to China’s economic growth and exports figures.

Until these two sets of figures become more aligned, we will constantly hear complaints that China’s approach to growth comes at the world’s expense.

3. China is a lucrative market, and that keeps multinationals on their toes

Few multinationals can boast about their growth success in China better than Starbucks.

The US coffee chain accounted for 51% of specialist coffee store chains in China at the end of 2017.

The high-end brand is expected to grow to more than 6,000 stores in the next few years.

And despite its allure – and those of us who visit China will notice the long queues at Starbucks stores, a single local player by the name of Luckin has managed to create some fierce competition for the well-established foreign brand.

Starbucks set up its first store in China back in 1999. It has now more than 3,600 stores in more than 150 cities.

Luckin on the other hand, has more than 1,400 stores in 21 cities. But it was only founded in 2017!

In 2019, Luckin is aiming to dethrone Starbucks’ leading position in the market by opening another 2,500 stores.

Such claims have caught the attention of Starbucks itself, with the company claiming that it won’t be possible for Luckin to catch up so quickly.

Despite being a start-up, Luckin does have strong backing in the form of Singapore’s GIC and China International.

China’s coffee market growth rate stands at 15%, significantly higher than the global average of 2%.

The market size was only 70 billion yuan back in 2015. But it is estimated to more than quadruple to 300 billion yuan by 2020 and then 1 trillion yuan by 2025.

So, it is highly lucrative and we won’t see Starbucks shying away from competition.

But Chinese firms are rising to the forefront of this market, as they do have a local advantage and there is a trend towards supporting local brands. Just ask Apple for a second opinion.

4. China’s e-commerce law

China’s first e-commerce law took effect on 1 January 2019.

The new law seeks to protect the rights and interests of all parties using e-commerce.

The law also categorises operators into ecommerce platforms, merchants on e-commerce platforms, and those doing business on their own websites or via other web services.

The law bans e-commerce operators with dominant market positions from excluding or restricting competition.

Consumer protection is a must – a survey of 12,000 online Chinese shoppers suggested that 70% had been sold knock-off products at some point.

With this newly added transparency, it is likely that prices of products bought over cross-border e-commerce platforms will go up.

While the law does not explicitly ban daigou (private shopping agents), the business license requirements and tax obligations in the new law make daigou less attractive as a channel.

Meanwhile the World Trade Organization is seeking to establish worldwide e-commerce rules.

Having just set its own rules, only time will tell if China will come party with any international e-commerce rules.

Possibility the largest market for consumption through e-commerce channels, China has every right to be cautious about opening this channel too soon.

5. China’s tech ambitions

China’s has clearly articulated its tech ambitions with its Made in China 2025 strategy.

I labelled it ‘Doing a Samsung’ – the transformation from a low cost low price player to a high value add one.

These ambitions are guided by working backwards – the goal of the country for 2049 is to become one of the superpowers in technology.

And part of its grand strategy is to have its One Belt One Road Initiative (BRI) supporting this process.

Further, the Chinese market is fast becoming a marketplace where technologies are created and patented.

In 2017, China’s domestic patent applications (1.38 million) were already double those of the US. Its applications for trademarks (5.7 million) and industrial designs (1.46 million) also led the way.

Gone are the days when Made in China stood for low cost low price (aka cheap) products. The new Made in China 2025 represents China’s ambition to develop further, and establish a stronger position for its role in world matters.