Forty years ago, after a long period of economic stagnation, China was not in the world’s top eight economies. Today, thanks to a breathtaking social and economic transformation that began in the late 1970s, China is on track to overtake the United States as the world’s number one economy within a few decades, if not sooner. By some measures, it has already done so. We are living in what many are now calling ‘The Chinese Century’.
China’s economy is the second-largest in the world,behind only the United States. But after three decadesof spectacular growth, China is now moving into a slowergrowth phase – an inevitable result of its transition froma developing economy to a more mature, developedeconomy. In the 1980s, 1990s and early 2000s, China’sannual GDP growth frequently exceeded 10 per cent,with an estimated 2019 growth of 6.3 per cent, althoughthis is likely to be closer to 6 per cent with the impact of the US-China trade war.
In coming years, the International Monetary Fund (IMF)forecasts China to continue growing at a rate of 6.3 percent in 2019 and 2020 and 6 per cent in 2021. Theseforecast figures still put it well ahead of most othermajor economies’ growth rates and keep it on track toeventually overtake the US as the world’s largest economy.Manufacturing, services and agriculture are the largestsectors of the Chinese economy – employing the majorityof the population and making the largest contributionsto GDP. Since 1949, the Chinese Government hasbeen responsible for planning and managing the nationaleconomy. But it was only after 1978 – when DengXiaoping began market-based reforms –that growth beganto take off, averaging 10 per cent annually for some 30years. During that period, the size of the Chinese economygrew by roughly 48 times, from USD 168.367 billion(current prices) in 1981 to USD 11.01 trillion in 2015.
Since the introduction of Deng Xiaoping’s economicreforms, China has what economists call a socialistmarket economy – one in which a dominant state-owned enterprises sector exists in parallel with market capitalism and private ownership. It was the active encouragementof private enterprise from 1978 that enabled China to kick-start the long expansionary boom that continuestoday. Private businesses now produce more than half ofChina’s GDP and most of its exports. They also createmost new jobs.
The irresistible rise of China has implications and consequences for us all on so many levels and it largely comes down to one word: opportunity. For Australia, and Australian businesses in particular, has there ever been an opportunity like China?
Under the socialist-market model, the ChineseGovernment plays a direct role in managing the economythrough its five-year plans that set goals, strategies andtargets. The five-year plans in the 1980s and 1990sfocused on market-oriented reforms, while the pasttwo five-year plans have focused on promoting morebalanced growth, better wealth distribution and improvedenvironmental protection. The current five-year planfocuses on increasing China’s competitiveness throughmore efficient and increasingly advanced manufacturing onthe east coast, attracting labour-intensive manufacturingto central provinces and increasing domestic demand.
Economic growth, which has in recent decades been drivenby export-led manufacturing, is now becoming morereliant on domestic consumption. The resulting increasein consumption spending represents a major opportunityfor Australian businesses that are able to successfullytarget their products and services to an increasinglyaffluent Chinese public. There is also encouragement forforeign businesses to invest in key areas such as advancedmanufacturing, energy saving, environmental protectionand modern services. Tightened regulation on energyconservation and environmental protection also presentsan opportunity for Australian businesses.
The perception of China since the 1980s as a predominantly low-cost manufacturing hub, where it effectively served as an inexpensive producer for global brands, is changing as the economy grows. Increasing labour costs and an ageing workforce have caused manufacturers’ pro t margins to decline steadily. As a result, while cost rationalisation is still an attractive feature of the China market, global and local businesses are now starting to change strategies to tap China as an engine for growth. Currently, approximately one-third of global business leaders rank China among their top three regions for generating growth over the next year.
Businesses contemplating establishing operations inChina should be aware that, despite long-held perception,average wages in China have been climbing on the backof the country’s economic emergence, to the point whereit is less a low-cost hub as it is a dynamic and complex economy. However, the recent cooling of the Chineseeconomy has blunted the wages surge after a double-digitincrease in 2009, as noted by the International LabourOrganisation. Nevertheless, average real wages in stateownedand other urban-based enterprises grew by 9 percent in 2016, while those of workers in private enterprisesclimbed 8 per cent in 2016. Reflecting the Chinese‘boom’ was the more-than trebling of the average annualsalaries of city workers from RMB 14,000 in 2003 toRMB 74,000 in 2017. Accompanying this new wealth,however, were sharply increased living costs.
For Australian businesses, opportunities in China havesprouted across a huge – some might even say bewildering– range of industries, market sectors and geographiclocations. Rapidly rising income levels in China and massmigration from rural to urban areas have created an abundantly large class of urban consumers demandingimproved housing, a cleaner environment, overseas travel,better education, a higher protein diet and an enhancedchoice of financial services. From the sophisticatedconsumers of developed cities such as Beijing, Guangzhouand Shanghai, to the growing middle classes in lesserknowninland cities, the newly industrialised China is averitable smorgasbord of opportunity.
This is not to say that doing business in China is withoutunique challenges and complications. Apart from languageand cultural barriers, which can be considerable, foreignbusinesses must navigate issues ranging from complexbureaucracies, challenges in intellectual property (IP)law enforcement, to quality control and the sheer,overwhelming size and diversity of the country. There is alsothe overarching challenge of the different way that businessis conducted in China compared with other countries, thelarge and highly competitive market for both domestic andforeign businesses, and the complexity of understandingand selling to the Chinese customer.
The rewards can be immense for Australian businesseswilling to put in the necessary preparation and hard workto address these challenges and successfully establishin China. The Chinese Government has continuedto introduce policies aimed at raising standards andencouraging more trade and investment, both inboundand outbound.
Want to learn more? Explore our other China information categories or download the China Country Starter Pack.
