10 Challenges On Chinese Future

Any approach to Chinese landscape ends falling into the same debate: Will China evolve or break over the next years?

Although experts do not agree (And neither do we!), in the team we believe it is important to name some of the most immediate challenges ahead for China.

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Current challenges are also the challenges of the future

When we talk about China, no one agrees. The huge boost experienced by China in the last thirty years has not buried the doomsayers who year after year have sown doubts about the future of China. Faced with them there are some enthusiasts who proclaim that the next world leadership belongs to China. Who has the reason? Not everything is white, not everything is black. Both sides are right.

Reforms, Where to start? Ten points to keep in mind

China is characterized by the dynamism that has developed in recent years. In order to ensure the future growth of the country, Chinese authorities must address some issues of particular importance:

First, Local Government Debt:

Local and regional government debt have been a terrible headache for analysts. We would like to underline the explanation Nicholas Zhu, senior analyst at Moody’s, gave,

“For the local government direct debt, we believe the government is finding a handle by capping it at 16 trillion yuan ($2.45 trillion) overall and improving the structure by swapping some existing debt into bonds at lower cost and longer maturity.”

However, in recent times the central bank started to allow qualified individual investors to buy and sell the bonds through commercial banks.

Second, Reform State Companies:

The Government is attempting to reform the state-owned sector while continuing to maintain its currently control. To do this, some different attempts have been made, such as: mixed formulas, restructuring, mergers, open up protected service sectors to private and foreigners, them all focused on enhancing their competitiveness and autonomy on private-sector markets.

Third, Liberalize the Financial Sector:

Financial liberalization is a key in Chinese reform, and it is closely linked to the privatization phenomenon itself. Both reforms will be needed to maintain Chinese growth, and facilitate the creation of jobs and the reliably channels credit to companies.  The success of economic reforms carried out, will be a determining point of stabilization or social destabilization, and are a sensitive issue in governmental action. As the country opens its doors further, as the former Australian ambassador to China, Geoff Raby said,

“Equally China will be more open to capital inflows.”

Fourth, Investment:

Investment in China is drived by Foreign Direct Investment, as a key which gives advantages to the supplier and also to the host. Moreover, is a thermometer of the future of the business, and China has already started to capitalize its benefits. At the same time, FDI depends on some key – factors:

• Capital Availability: China is already the world’s largest recipient of foreign capital.
• Competitiveness: Rests on the country’s capacity to develop its infrastructure, resource availability, productivity and workforce skills.
• Regulatory environment: A difficult legal doctrine and excessive regulation, have been a serious handicap for investment in China. Things are changing, but it is still far to be as it should be.
• Openness to trade –especially international one.

Fifth, Deflation:

To achieve the Chinese structural goals, it is a necessary condition that the country’s growth rate is maintained over 5 years above 6.5%. Moreover, in China Dollar strength prevents avoid closing 2016 with deflation, and has contributed to high capital outflows in recent years.

Sixth, Chinese Demand for Hard Commodities:

A very important point to consider for countries that produce raw materials as iron, copper or aluminum.  Its prices will drop sharply as long as its demand will go slower. This expectation is opposed to food, which will keep increasing due to the growth of Chinese middle class.

Seventh, Manufacturing:

China´s export competitiveness are based on three main principles: low unit – labour costs and interested rated, and an undervalued yuan. Due to the paradigm shift, it is expected that China’s strength at this point has begun to crack; an opportunity for others countries after all!

Eighth, Innovation:

Over the past five years, China has promoted with great vehemence its innovative sector. The technical, economic and human development are impressive, especially its efforts in Science & Technological graduates.  According to Mckingsey Global Institute,

“China must generate two to three percentage points of annual GDP growth through innovation, broadly defined. If it does, innovation could contribute much of the $3 trillion to $5 trillion a year to GDP by 2025.”

Nineth, Environment:

China lives in a permanent Environmental crises: air and water pollution, deforestation and desertification, biodiversity, high rates of cancer and the growth of a middle-class who is adopting a Western –style consumer patterns have become a huge problem for future. China needs to change the course of its current model. Therefore, he has embraced renewable energy.

Tenth, Consumption:

We cannot talk about Environment without mention Consumption. The sharp increase of in domestic consumer patterns and the Chinese middle-class prosperity, will need of a sustainable and growing consumer economy based on the need of big service sector reforms.

 

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Companies must be ready. How to be competitive in China?

The rapid evolution of the world stage precludes long-term estimates. Having an updated database and the example of a specialized agency, is always a clear advantage in any approach to the market, but even more in China. It has never been enough for global business to know what is coming, but also knowing how to take advantage of every opportunity that arises in the market.

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