Before China can be seen as a world leader, it needs to reinforce its domestic economy and maximise the local opportunities before overseas corporation seize the
chance to do so. A conference at Chatham House (London) on the 12th of November examines this topic with the support of China-Britain Business Council. The discussion was leaded by four panellists: Benjamin Schmittzehe (CEO of Schmittzehe & Partners), Jasper Becker (Former foreign correspondent and Editor in Asia for 18 years), Eric Thun (Peter Moores University Lecturer in Chinese Studies, Said Business School, University of Oxford) and Dr. Kerry Brown (Associate Fellow, Chatham House).
Macro: Shift from export to domestic market
chance to do so. A conference at Chatham House (London) on the 12th of November examines this topic with the support of China-Britain Business Council. The discussion was leaded by four panellists: Benjamin Schmittzehe (CEO of Schmittzehe & Partners), Jasper Becker (Former foreign correspondent and Editor in Asia for 18 years), Eric Thun (Peter Moores University Lecturer in Chinese Studies, Said Business School, University of Oxford) and Dr. Kerry Brown (Associate Fellow, Chatham House).Macro: Shift from export to domestic market
It is a common misconception to think that China needs to create a shift from an economy based on export to a domestic consumption economy. From a macro perspective, the government needs to focus on both markets equally. The domestic market by now represents 35% of the GDP in China, it might be lower than the UK and USA ranging from 60% to 75%, but nonetheless the local market already has a fundamental role that cannot be neglected. On the other hand, the net export rate is still growing fast and will rise once the global economy will pick up. This might be a factor why China is focusing more rapidly on the domestic consumption.
China has a traditional saving culture that is slowly being erased by the young generation. It is important to note that the successful entrepreneurs are between 20 to 30 years old which is very young next to the West.
One aspect on the government agenda is to create an “iron rice bowl” for the population so they do not need to worry financially about health, education and pension. Since this governmental support has yet to be seen, this is one of the main barriers for the Chinese to adopt a spending behaviour rather than saving. One popular way to save is through investment, mainly in large cooperation and in the government, which is worth around 40% of the GDP. This figure is high due to the large number of companies who work hand in hand with the government.
Consumption in China
The Chinese are starting to have the luxury to spend more on what they want compare to sticking to what they need. This is in partly due to capitalism. In the urban area, there is a growth in health care, education and pension funds which leads to more recreational spending. Tier 2 in China already sees saturation of product due to the over supply. In the rural areas, the spending is still on basic expenditure partly due to the lack of choice. This opens up a great opportunity for business to reach to the rural areas of China. For example the food spending in the U.S. in 1985 was equal to China’s food spending in 2005. There is large margin for growth in that industry as well as for many more. One of the main limits to domestic consumption is low infrastructure. On the bright side the stimulus package is helping move forward from that issue but is not the entire solution. One cost effective solution is internet shopping which has created a rise in credit cards use.
China joining WTO (2001)
It was a thought that the consequences of China joining the WTO would create a disadvantage for China as the multi nationals would dominate the market. This was not the case. The Chinese firms reacted quickly to the new competition which boosted the local economy. For example, the percentage of Chinese people owning shares is domestic firms in 2006 is higher than to 2001. This is just an example out of many of how the WTO in China has boosted the local market.
The battle for the middle
Each domestic industry in China is separated in three segments: the high end, the middle; and the low end. The low end sector is largely dominated by the Chinese and the high end sector by multi nationals. This is due to the technological and quality advance from the West. The advantages for the bottom end market for local corporations is that it can create or adjust its price to suite the population, it can focus solely on the Chinese markets and the industry is separated in large sectors which makes it more practical to provide for many with one single product type. However, all these advantages attract high competition within the domestic market, leading to very tight profit margins. On the other hand, the multi nationals enjoy the large economy of scale in the high end sector. They are also facing high competition difficulties as, as mentioned above, the urban area is a small portion of China’s population and the market is already saturated.
Nowadays, the middle market has the biggest growth, which is a big opening i
n China. Hence both local and multi nationals firms desire a large portion of it. To gain that advantage, the multinationals are localising design and sourcing to be more fitted for the competition in the domestic market. The other side of this change is that the local population (companies) are being trained by the multinationals, which helps them (Chinese) compete with a smaller gap. China is the only developing country that can grow in such way due to its “luxury of size”. The increase of competition that followed China joining the WTO is in favour to local businesses and augmented the opportunities in the domestic market.
China has a traditional saving culture that is slowly being erased by the young generation. It is important to note that the successful entrepreneurs are between 20 to 30 years old which is very young next to the West.
One aspect on the government agenda is to create an “iron rice bowl” for the population so they do not need to worry financially about health, education and pension. Since this governmental support has yet to be seen, this is one of the main barriers for the Chinese to adopt a spending behaviour rather than saving. One popular way to save is through investment, mainly in large cooperation and in the government, which is worth around 40% of the GDP. This figure is high due to the large number of companies who work hand in hand with the government.
Consumption in China
The Chinese are starting to have the luxury to spend more on what they want compare to sticking to what they need. This is in partly due to capitalism. In the urban area, there is a growth in health care, education and pension funds which leads to more recreational spending. Tier 2 in China already sees saturation of product due to the over supply. In the rural areas, the spending is still on basic expenditure partly due to the lack of choice. This opens up a great opportunity for business to reach to the rural areas of China. For example the food spending in the U.S. in 1985 was equal to China’s food spending in 2005. There is large margin for growth in that industry as well as for many more. One of the main limits to domestic consumption is low infrastructure. On the bright side the stimulus package is helping move forward from that issue but is not the entire solution. One cost effective solution is internet shopping which has created a rise in credit cards use.
China joining WTO (2001)
It was a thought that the consequences of China joining the WTO would create a disadvantage for China as the multi nationals would dominate the market. This was not the case. The Chinese firms reacted quickly to the new competition which boosted the local economy. For example, the percentage of Chinese people owning shares is domestic firms in 2006 is higher than to 2001. This is just an example out of many of how the WTO in China has boosted the local market.
The battle for the middle
Each domestic industry in China is separated in three segments: the high end, the middle; and the low end. The low end sector is largely dominated by the Chinese and the high end sector by multi nationals. This is due to the technological and quality advance from the West. The advantages for the bottom end market for local corporations is that it can create or adjust its price to suite the population, it can focus solely on the Chinese markets and the industry is separated in large sectors which makes it more practical to provide for many with one single product type. However, all these advantages attract high competition within the domestic market, leading to very tight profit margins. On the other hand, the multi nationals enjoy the large economy of scale in the high end sector. They are also facing high competition difficulties as, as mentioned above, the urban area is a small portion of China’s population and the market is already saturated.
Nowadays, the middle market has the biggest growth, which is a big opening i
n China. Hence both local and multi nationals firms desire a large portion of it. To gain that advantage, the multinationals are localising design and sourcing to be more fitted for the competition in the domestic market. The other side of this change is that the local population (companies) are being trained by the multinationals, which helps them (Chinese) compete with a smaller gap. China is the only developing country that can grow in such way due to its “luxury of size”. The increase of competition that followed China joining the WTO is in favour to local businesses and augmented the opportunities in the domestic market. 
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