CHINAwatch

With the rise of protectionism, would the economy be in trouble in China and rest of Asia in 2018?

A PowerPoint presentation to the Executives' Global Network (EGN) on 27 March, 2018. 

Download With the rise of protectionism would the economy be in trouble in China and rest of Asia in 2018

What can we expect in China in 2018?

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.

Download Mckinsey - China 2018  

China's Belt and Road Initiative: Opportunities for the Aegean Region

My PowerPoint presentation at the international Aegean Economic Forum on 26 October, 2017.

At the Forum, I highlighted key messages of President Xi's 30,000-word Speech at the 19th Party Congress, the nation's existential threats and epochal opportunities, the makings of the Belt and Road Initiative, and ways to leverage it for the benefit of the Aegean Region.

Download OBOR Economic Opportunities for Aegean Region

Download AEGEAN FORUM invitation

Download Aegean Forum Program

The Aegean Forum is a new conference series organized by the Özgencil Organization. For over 16 years, they organize the prestigious annual Forum Istanbul which are supported by the highest levels of the Turkish government, including Deputy Prime Minister. I was a sponsored Speaker at the Forum Istanbul for five years in a roll. See my last Forum Istanbul PowerPoint presentation in 2015 on Turkish-China Relations: New Silk Road in a Changing World. 

How China connects the world

Part Two of a 4-part special presentation to the top management of an European Union enterprise.

Download How China connects the world  

 

 

The Chinese consumer in 2030

In a November 2016 report on the rise of the Chinese consumer, the Economist Intelligence Unit (EIU) offers the following findings -

• Private consumption is now the main driver of economic growth in China. It will grow in real terms by 5.5% a year on average in 2016-30 – boosting its share of the overall economy to nearly 50%. Incremental growth over the next 15 years is expected to exceed the current level of consumer expenditure in the EU.

• Nearly 35% of the population, or around 480m consumers, will meet definitions of upper middle-income and high-income by 2030. That represents a sharp increase on the 10% (132m) at present. They will have a personal disposable income of at least US$10,000 and will alter the consumer landscape in China.

• Income will become more dispersed, rather than concentrated in first-tier cities on the eastern coast. Major interior cities, such as Changsha, Chengdu, Chongqing and Wuhan are set to see sizeable leaps, with each having at least 2m high-income consumers by 2030. Nevertheless, smaller cities and those undergoing industrial restructuring risk being left behind, suggesting that high levels of income inequality will persist.

• Around 30% of the spending by the average Chinese consumer is still allocated to food, compared with only 15% in South Korea. As income levels rise, consumers will look to upgrade consumption habits and switch to more expensive and premium brands. This will play out in the automotive, tourism and financial services sectors.

As for What is driving the Chinese consumer,, a Mckinsey Report of April, 2016 notes that there are distinctive shifts from products to services, from mass products to premium brands (including loyalty to top international brands), from mere goods to lifestyle, health and well-being, from Online to O2O (Online-to-Offline), from in-store shopping to associated leisure experience on-site such as restaurants and cinemas, and from individual to joint family leisure activities.  

What is driving the Chinese consumer, economic headwinds notwithstanding

Based on interviews with 10,000 consumers aged 18 to 65, in 44 cities, a Mckinsey Report of April, 2016 finds that, despite current economic downturn, Chinese consumers remain confident—and in 2015 they continued to substantially increase spending within and outside China. Nevertheless, there is regional divergence, as in Harbin, where consumer confidence faces steep decline. 

There are distinctive shifts from products to services, from mass products to premium brands (including loyalty to top international brands), from mere goods to lifestyle, health and well-being, from Online to O2O (Online-to-Offline), from in-store shopping to associated leisure experience on-site such as restaurants and cinemas, and from individual to joint family leisure activities.  

Click here for a Summary interview with podcast. 

Click here for the 2016 McKinsey China Consumer Report - The Modernization of the Chinese Consumer, with the following synopsis -

"The eyes of the world are on the Chinese consumer. Cooling economic growth, a depreciating currency, and a gyrating stock market are making political and business leaders concerned that China’s economic dream may have finally ended, and tough times lie ahead. Despite the gloomy news about the state of the economy, consumer confidence has remained surprisingly resilient over the past few years, as salaries have continued to rise and unemployment has stayed low. Chinese consumers remain upbeat about their futures. However, beneath this statement lurks significant change. The days of broad-based market growth are coming to an end as consumers become more selective about where they spend their money. Spend is shifting from products to services, and from mass to premium segments. Consumers are seeking a more balanced life, where health, family, and experiences take priority. In short, our research suggests that winning in the China market will become more challenging for consumer goods companies. For those that get it right, however, the reward will be substantial".

"The survey results also highlighted the astounding popularity of internationaltravel among Chinese consumers and their exceptionally rapid adoption of trends such as mobile payments. In addition, the study confirmed the great variation in consumer behavior among China’s 22 city-clusters. Cluster differences have even increased in recent years, despite the increased flow of information between clusters online and growth in domestic travel."

 

 

Mainland visitor's child urination incident in Hong Kong

My live interview on China 24 with CCTV Beijng broadcast on 27 April, 2014.Click here

(Move red bar at bottom of screen to recording indicator 10:33 to access start of my interview.)

High Speed Empire - China's global rail ambitions

Notwithstanding initial haste, cut-corner standards, and power corruption somewhat reminiscent of the railway barons of Frontier America, China has been building a vast high-speed rail network sprawling across the Middle Kingdom.

What is more, capitalizing on reversed engineering and more, China is connecting her high-speed rail network across continents to South West Asia, Central Asia and Europe as well as exporting highspeed rail technologies across the globe. 

A Feature Report of Foreign Policy dated 13 March 2014 by Bytom Zoellner shows how China's "High Speed Empire"  is taking shape.

Download Foreign Policy - High-Speed Empire