China Country Market
Insights and Opportunities
China has not escaped the recent global economic downturn. With an economy heavily dependent on exports to developed markets, the sharp drop in global consumer demand has had a significant effect on China’s economy. In 2007 China’s economy grew by 13 percent and had maintained double-digit growth for most of the past decade. In 2008 Gross Domestic Product (GDP) growth dropped to 9 percent, perilously close to the 8 percent growth that many economists believe to be required to feed China’s economic engine. Preliminary Chinese economic figures for the last quarter (Q4) of 2008 indicate that this decline is continuing and accelerating
Over the past several years, increases of U.S. exports to China averaged close to 10 percent year on year. In 2008, U.S. exports to China increased by 9.5 percent from the year prior, according to the U.S. Census Bureau, helping to make China one of the fastest growing foreign markets for U.S. goods. China-U.S. total trade grew to USD 409.2 billion, placing China as our second largest trading partner behind Canada. Although U.S. imports of Chinese goods greatly exceed U.S. exports to China, China remains our third largest export market. U.S. exports of goods to China totaled USD 71.5 billion for the year in 2008.
In 2008, inflation, measured by the country’s consumer price index, dropped slightly from the year prior to 5.9 percent but continues to be an economic threat. China’s manufacturing base helped the country hit record trade surplus levels of USD 297.4 billion in 2008. Foreign investment is strong with China remaining as one of the main destinations for foreign capital investment, though growth began to slide in 2008. China’s economic miracle is tempered by a number of looming threats, namely a rapidly aging population and a perilously deteriorating environment.
On November 9, 2008 the Chinese government, in order to shore up the weakening domestic economy, unveiled a USD 585 billion (RMB 4 trillion) economic stimulus plan. USD 263 billion, or 45 percent, of the stimulus package will go toward the construction of railways, highways, airports and power grids; another USD 146 billion will be used for post-disaster reconstruction, which includes rebuilding after snowstorms that hit Central China in early 2008 and the earthquake that struck Sichuan province in May. USD 54 billion will go towards rural development and infrastructure projects; USD 51 billion has been earmarked for ecological environment; USD 41 billion will be used for low-income housing; and the rest will be spent on health, culture, education and innovation.
Despite these remarkable changes, China is still a developing country, albeit one with vast potential. Spread over a population of 1.3 billion, China’s colossal economy does not represent a large amount of disposable income for each person. Annual per capita income in China is around USD 1,700. Yet, surprisingly, China stands as the world’s third largest market for luxury goods behind Japan and the United States. The income distribution within the country is highly uneven with urban centers, such as Beijing and Shanghai, enjoying a per capita income of more than double the nation’s average. Some studies estimate that there are now more than 200 million Chinese citizens with a per capita income over USD 8,000. That said, China’s per capita income figures are poised to change dramatically. Over the next several years, many economists predict a surge in the number of people achieving middle class status.
American companies continue to have mixed experiences in China. Many have been extremely profitable, while others have struggled or failed. To be a success in China, American companies must thoroughly investigate the market, take heed of product standards, pre-qualify potential business partners and craft contracts that assure payment and minimize misunderstandings between the parties. The problems of doing business in China can be grouped in four large categories.
China often lacks predictability in its business environment. A transparent and consistent body of laws and regulations would make the Chinese market more predictable. However, China’s current legal and regulatory system can be opaque, inconsistent, and often arbitrary. Implementation of the law is inconsistent. Lack of effective Chinese government protection of intellectual property rights is a particularly damaging issue for many American companies, both those that operate in China and those that do not, have had their products stolen by Chinese companies.
China has a government that practices mercantalistic style policies. China has made significant progress toward a market-oriented economy, but parts of its bureaucracy still protect local firms, especially state-owned firms, from imports, while encouraging exports. WTO membership will mitigate these tendencies over time – but progress is only gradual.
China retains much of the apparatus of a planned economy. A five-year program sets economic goals, strategies, and targets. The State and the Communist Party directly manage the only legal labor union. In many sectors of the Chinese business community, the understanding of free enterprise and competition is incomplete. Certain industrial sectors are prone to over-investment. Excessive investment leads to over production, bad debt and declining prices in affected industries.
Foreign businesses tend to under-estimate the challenges of market entry in China. Encouraged by a government eager for foreign capital and technology, and entranced by the prospect of 1.3 billion consumers, thousands of foreign firms have charged into the Chinese market. These companies often do not sufficiently investigate the market situation - common pitfalls involve not carefully reviewing product standards and conformity assessments, such as China’s Compulsory Certification (CCC); not fully understanding legal issues, like protecting intellectual property rights; and not properly vetting local business partners.
It is important to understand that while continued reform is absolutely essential for China to achieve the economic growth it requires and to fully participate in the world trading community, in many areas, the necessary changes have not yet taken place. Companies must deal with the current environment in a realistic manner. Risk must be clearly evaluated.
Since 1979, China has reformed and opened its economy. The Chinese leadership has adopted a more pragmatic perspective on many political and socioeconomic problems, and has reduced the role of ideology in economic policy. China's ongoing economic transformation has had a profound impact not only on China but on the world. The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship. The result has been the largest reduction of poverty and one of the fastest increases in income levels ever seen. China today is the fourth-largest economy in the world. It has sustained average economic growth of over 9.5% for the past 26 years.
China is now one of the most important markets for U.S. exports: in 2008, U.S. exports to China totaled $71.5 billion, a 9.5% increase of $16.2 billion from 2007. U.S. agricultural exports have increased dramatically, totaling $12.2 billion in 2009 and thus making China our fourth-largest agricultural export market. Leading categories include: soybeans ($7.3 billion), cotton ($1.6 billion), and hides and skins ($859 million).
The growth of imports from the United States in many key sectors, such as energy, chemicals, machinery, telecommunications, medical equipment, construction, financial services, and franchising make China an important and viable market for United States products and services.