An in-depth, across-the-board Mckinsey report dated December 2017 by director emeritus and senior external adviser Gordon Orr offers the following insights -
International expansion
- Focus on Manufacturing 2025 sectors and Internet-enabled strategic businesses, such as artificial intelligence (AI) and the Internet of Things, including computers, aviation, and automotive to wealth management, healthcare, tourism, education, gaming.
- With political push-back in the United States, Brazil, Japan, UK, Israel and Scandinavia show signs of increasing interests.
- Belt and Road projects - more scrutiny, potential delays but also more projects under way. Focus more on what business opportunities would result than on gaining a slice of the construction work.
- China to grow global soft-power by investing more in Confucius Institutes at universities, in international media projection on traditional TV and online, and through overseas development-aid (e.g. largest recipient Cuba).
Domestic centralisation & control
- From punishment of irregularities to much clearer and complete set of regulations on wealth management, insurance and online financial services, minimising regulatory arbitrage.
- All online payments now have to pass through a central government clearing house,to monitor who is passing money to whom.
- Data-protection and cybersecurity laws to become clearer.
- A National Supervision Commission will oversee inspections of all government departments, institutions, and SOEs, including traditional heavy industries such as coal, steel, and chemicals.
- Popular online payments to render cash obsolete in China by 2020. Smart cities using AI on government, business, and individual data already at scale. Requiring real-name usage of the Internet allows oversight of online behaviour.
- Facial-recognition technology has progressed to the level that Tencent can work with public security bureaus to identify children stolen from their families, even years after the event, by projecting how facial characteristics will evolve and picking them out on CCTV in public areas or online.
Domestic industry tipping point
- China has out-performed France, US, and Japan in both supply and demand of Electric and Near Electric Vehicles. Regulation focuses on share of new-energy vehicles versus traditional combustion-engine vehicles. Shortfall requires carbon credits. Another focuses on fuel efficiency of cars sold.
- All part of government’s ambition to dominate the global electric-vehicle (EV) market by 2030.
- More than $50 billion subsidies for the industry by 2020. Power-grid companies have installed nearly 200,000 charging stations.
- BYD and CATL aggressively hiring talent from South Korea and the United States.Volkswagen has committed to a $10 billion-plus program to develop EVs in China.
Pharmaceuticals
- China Food and Drug Administration has streamlined drug approvals. More than 35 major new launches (mostly MNCs) in 2017 (only five in 2016). More than 300 drugs added to the National Reimbursement Drug List.
- Billions of dollars of private-equity and venture-capital funding supplemented by innovation by Chinese companies such as Baidu, Ping An, and Tencent, using AI and big data–based innovations, working with local government and hospitals. MNCs e.g. Bristol-Myers Squibb, launched China’s first outcomes-based insurance program for hepatitis C in partnership with Shanghai Pharma and Huatai.
Steel, Cement and Coal
- More effective regulation of output volumes, of days of production, of pollution output, and of capital investment will genuinely reduce output. State-owned enterprises to be further consolidated, their surplus capital given as dividends to the state pension funds (which hold 10% of their shares).
- Remaining, hopefully large-scale higher-quality companies could see a virtuous cycle of less capacity, fewer competitors, a more orderly market, higher prices, higher profits, higher dividends, and happier owners. Exports will still be used as a release valve, causing disruption in markets that remain open to Chinese steel imports.
Pensions and Asset Management
- Establishment of Financial Stability and Development Committee in 2017 will see shadow banking, wealth-management products, and online microlending curtailed.
- Consolidation and reconcentration of assets is possible.
- Trillions of dollars of assets will be looking for return in new areas, potentially rapidly expanding the $1.7 trillion public mutual-fund market. China’s fund-management sector already doing extremely well; first half of 2017, net margins greater than 30%.
E-sports, not soccer
- Soccer entrepreneurs are realizing that it is much easier to buy a soccer team than to run it successfully. In contrast, China’s e-sports players are driving the global industry. With more than 1,000 professional e-sports players in China, top 20 each earned more than $1 million in competition prize money. Sponsorships add much more. Revenues rising well over 25% annually.
In-bound investment
- Invitations issued to current and potential foreign investors, urging them to come with lists of bottlenecks that could be removed to speed up new investment. Opening-up announcements led by the financial sector allow foreign companies to undertake new activities in free-trade zones.
Greater Bay Area
- Comprising Guangzhou, Shenzhen, and Hong Kong—along with other cities— a total population of 70 million, with GDP per capita of more than $20,000
- Headquarters of many of China’s most innovative start-ups and scale enterprises. A world-leading combination of hardware and software capabilities, and great depth of international financial resources. High demand for high-skilled blue- and white-collar workers. Shift into more value added, more automated manufacturing sectors.
- The region’s population grew faster in 2000 to 2010 than any single province. Median age five years below the northeast, giving it almost ten workers per pensioner. Local governments working hard to retain migrants permanently, making it easier for their children to register in local schools and to join local social insurance schemes.
Consumer wealth
- Inflation rising slightly and real disposable incomes rising 8 percent nationwide. Consumer spending continue to grow in high single digits, backed by very strong levels of consumer confidence (with wide regional variations).
- Spending will grow on health-related areas such as healthier foods, exercise activities, and medical expenses (for themselves and for elderly relatives).
- Increasingly, consumption growth will be driven by generation born in the 1990s with no experience of recession and more balanced aspirations between achievement and enjoyment.
- Property not as attractive in 2017, with only single-digit price rises nationwide. Divergence across regions becoming ever wider. With government restricting access to mortgages and pushing the development of the rental market, more stable prices may become the norm.
- Individuals picking their own stocks to buy, and investing in active fund managers. Outbound investment through official channels into international stocks and bond markets. More funds flowing to private equity and venture capital.
Social priorities
- Pollution - More than 30 cities, mainly across northern China, have committed to reduce particulate matter (PM) 2.5 density by 15 to 40 % over the winter. Heavy polluters are being closed for the season, some given money to upgrade their pollution-reduction equipment.Older vehicles are being restricted from cities, and alternate-day license-plate limits imposed. Natural-gas supplies are being extended into surrounding rural areas to substitute for coal burning. A good start, at least in Beijing, with PM 2.5 down 30 percent for October and November.
- Anti-poverty - As part of becoming a “moderately prosperous country” by 2020, the government is seeking to eliminate all areas of absolute poverty. In part, through transfers from the center. More will come from directing businesses, both state owned and private to establish operations locally to employ people from the poorest areas.
Conclusion
- A year of slightly slower growth, with wider variations across provinces and cities than ever, driven by increased consumer spending skewed to wealthier cities and higher government social spending. This will be weighed back by lower property and infrastructure spending. Net exports remain the largest uncertainty. Subject to United States vagaries, a year of very positive developments in many sectors, framed by an environment of tighter and more centralized regulation and control.
