The Evaluation Of China's Market Potential

Beijing's managed deceleration of the economy continues. Growth of real GDP will slow to 6.4% in 2018 after gains of 6.9% in 2017. Private consumption is the main driver, but exports will also see steady gains. Public spending for non-military purposes will be cut back. Officials will also ramp up efforts to cut risk in the financial system and shut down inefficient factories. The threat of new protectionist measures is a growing concern. In the second quarter of 2018, GDP grew at its slowest rate since 2016.Prices should rise by 2.0% in 2018 after inflation of 1.6% in 2017. The central bank is injecting large sums into the banking system in an effort to ease monetary policy as the economy slows.

The rebalancing towards services and consumption will continue. Although the 13th Five-Year Plan sets a growth target of 6.5% for 2016-2020, rates of growth in real GDP are expected to slip to about 5.1% per year by 2025.The growing number of millennial consumers will soon dominate China's middle-class. According to government forecasts, the average annual income of the millennial group will increase from US$5,900 in 2014 to US$13,000 by 2024. At the same time, China's Belt and Road Initiative will boost trade and investment ties with participating countries.

Meanwhile, officials are expected to take more aggressive steps to tame an unsustainable build-up in debt. Total credit in the economy is approximately 260% of GDP and could exceed 300% as soon as 2020. The IMF estimates that improving weak companies and reducing overcapacity would boost GDP growth by 0.7-1.2% per year. Officials will likely temper their efforts to tighten credit policy with a policy of selective easing to ensure that small businesses and agriculture have sufficient access to credit.

Structural changes in China's economy are gradually dividing companies into two distinct groups. The old industrial base made up of firms focused on energy, materials and most manufactures. Alongside this group a "new economy" is propelled by technology, the internet and the consumer choices of millions of upwardly mobile consumers - most of them born since 1980. This group tends to be tech-savvy, environmentally aware and health conscious and their purchases drive the "new economy" which includes firms in sectors such as consumer, healthcare and IT.

With 80% of the working age population already employed, there is limited room for gains in employment to make a significant contribution to growth. Labour constraints will tighten in the longer run; according to the World Bank, China's working age population will fall more than 10% by 2040 despite abandonment of the one child policy. Thus, much of any future increase in output will have to come from greater productivity.

Population

In 2017, China's population was almost 1.4 billion - an increase of almost 125 million since 2000. Population, however, is growing at a decelerating pace. The fertility rate was 1.8 births per female in 2017. It is expected to gradually increase, reaching 2.1 births per female by 2030 (equal to the replacement level). China abandoned the one-child policy in 2015. The controversial policy is estimated to have prevented about 400 million births since it began in 1979. All couples are now allowed to have two children.

China is rapidly urbanising. As recently as 1980, less than 20% of China's population lived in cities but today more than half of all Chinese live in urban areas and up to 70% are expected to be urbanites by 2030.China is ageing at a rapid pace. In 2017, the median age was 37.9 years - 7.6 years greater than the figure for 2000 - and it will be 41.9 years by 2030 (well above the regional average). In 2017, the number of Chinese over 65 years totalled 148 million. This figure represented 10.7% of total population. In 2030, a projected 16.9% of all Chinese (almost 247 million) will be over 65 years.

Income and Expenditure

China's savings ratio was 36.6% of disposable income in 2017. The ratio will dip to 36.4% in 2018. China's savings ratio is more than one and a half times the regional average. In 2017, consumer expenditure per capita amounted to RMB22,750 (US$3,366). In real terms, the indicator will grow by 6.8% in 2018. Clothing and footwear will be the fastest growing expenditure category in 2018-2030 followed by housing.

For the period 2018-2030, total consumer expenditure will grow at an average annual rate of 5.4% in real terms. It will increase by a cumulative value of 87.5% during those years. Total consumer expenditure will represent 38.0% of GDP in 2018. The ratio has been gradually rising in recent years but is still well below the regional average. Disposable income per capita totalled RMB36,481 (US$5,398) in 2017. In 2018, disposable income per capita will grow by 6.7% in real terms. During the period 2018-2030, total disposable income will increase by a cumulative value of 88.4% in real terms - growing at an average annual rate of 5.4%.

Political Structure

All legislative authority is vested in the 2,989-member National People's Congress, which is elected every five years. The Congress, however, meets only once a year, and the Communist Party undertakes most political decisions.

Political Stability and Risks

With 56 officially recognised ethnic groups in the country, the unrest of some minorities is a constant problem. The government has implemented a sweeping crackdown of Uighurs suspected of involvement in terrorist plots. Discontent among Han residents of Xingjian is also a concern. Withholding Taxes Under China's Corporate Income Tax (CIT) law, payments made to Canadian businesses by a Chinese buyer are subject to a 20% withholding tax. This withholding tax rate is reduced to 10% due to the tax treaty between Canada and China. The types of payments subject to withholding taxes include:- Dividends and bonuses- Interest, rents and royalties- Income from property sales

Language in China

The common language in China is Mandarin, often known as the 'Han language' which is spoken in the People's Republic of China and Taiwan. It is the language favoured by the government, education and media. Cantonese is also commonly spoken in Guangdong, Hong Kong, Macau and Singapore. While both languages are Sinitic, that is to say they originate from the Sino-Tibetan language family, they are not mutually intelligible. As China is such a vast country there are many hundreds of dialect differences which do not always render them collectively intelligible.

International Issues

China is surrounded by 14 states with some borders still in dispute. No relations are more difficult than those with Taiwan but there are also territorial disputes with other states involving the potentially hydrocarbon-rich Spratly Islands. China rejects a decision by the Permanent Court of Arbitration in the Hague that it has control over the Spratly Islands' waters or resources. Beijing has said it will not be bound by the ruling. China and Japan have a dispute regarding the exploration of natural gas in the East China Sea.

China, Japan and South Korea have resumed their annual trilateral summits which have not been held since 2012. The latest round of talks focuses on regional co-operation in economic and social fields. Beijing ratified the Paris climate change agreement (already approved by more than 190 countries) in September 2016.China ordered North Korean companies operating in the country to shut down following the latest round of UN sanctions on Pyongyang. China accounts for as much as 90% of North Korea's trade. Beijing has accused the US of an illegal maritime incursion after an American warship sailed close to an artificial island in disputed waters.

Do's Dont's"

• Do some initial background research.
• Carry out extensive market research before entering the market.
• Segment the market (by geography, income and customer habits).
• Determine the best entry vehicle according to results of research.
• Determine the best routes to market and channel partners.
• Consult with legal experts to create an IPR strategy for China.
• Register trademarks in China prior to market entry.
• Carry out due diligence on prospective partners and employees .
• Rely on hearsay or third-hand market information from Chinese partners.
• Assume that similar market conditions apply throughout China.
• Invest in a local presence prior to researching the market thoroughly.
• Choose partners or employees without proper due diligence.
• Assume that IP rights are automatically protected under Chinese law.

Conclusion

Making that first step into the China market is an intimidating step for most companies in the b2b arena, with an almost endless series of potential pitfalls to be negotiated. Although there are often many obstacles in the way of achieving success in China, the rewards of successfully navigating this difficult course are also immense. Thankfully, as China's economy continues to grow and become more open to foreign companies, the rewards increasingly outweigh the challenges of doing business in China. While the old adage "In China everything is possible, but nothing is easy" still rings true for many foreign companies when doing business in China, the extent of this difficulty seems to decline further with every passing year.

China is a country that is constantly changing and its markets are evolving more rapidly than almost anywhere on earth. As such, there is no one-size-fits-all approach by which foreign companies should approach the China market. Each company's China strategy is likely to be informed by any number of different factors - from industry sector, product type, company size and culture, through to long-term business aims and global corporate vision. A brief summary of the 'Dos and Don'ts' that any foreign company approaching the China market for the first time should take into consideration.