Postcard from Beijing - the stirring Chinese economy
August 20, 2014
Just over 14 years ago when I was last in China I was fortunate to witness a nation on the cusp of development and opening up. When I was in Shanghai and Beijing way back then I discovered places that had been untouched by the economic revolution and that were still to very much come out of their skin (so to speak). I remember walking along the Bund in Shanghai and looking at all of the old buildings built by the early twentieth century western insurance companies and banks and when in Beijing was amongst only a handful of people walking around the Forbidden City.
Today both cities have become unrecognisable to me and I will argue that is a good thing. The remnants of history remain, such as the Forbidden City and the Great Wall of China, but something remarkable is happening. Instead of being amongst a handful I am amongst thousands. The lines to access the Forbidden City are long and standing in the heat (for the unprepared) can be a little confronting. But standing in the lines are not a majority of western tourists – they are Chinese. People who have come out of their shells and are rediscovering culture in all its parts.
But just to focus in on the rediscovery of culture would be wrong given we are focussed on business and entrepreneurship. What else has happened between the first time I arrived in China and now is the immense development of business and industry. Chinese GDP has increased dramatically since 2000 by a factor of five and while growth has slowed in recent year’s forecasts are still ranging from 7-7.8% per annum. Sure it’s not as good as things were back in 2008 when that figure was sitting at 12% but in the greater scheme of the world wide economy it’s pretty good – and more is to come.
If you reason that growth to date has been to find the right model that suits China’s export and import opportunities aligned with internal consumptive demand and the rise of the middle class as a result of her policies then you could say the best is possibly to come.
This is why investors and those looking to build their business should look to China as demand continues to stabilise with an ever vigilant eye on the increasing number of the middle classes – whose spending power will grow. The offset of that increasing in internal consumption however is rising costs and the challenges of affordability. In 2008 (I remember this very clearly) you could buy a branded t-shirt for less than $5. Now, in a Gap store, you would be lucky to have change from $20. Ironically enough when I was in New York recently I went to an outlet store and could buy the same t-shirt style for $10. The label says “made in China”. This of course begs the question that if the brand and style t-shirt costs more at the place of manufacture then how, with all of the transportation and middle-man costs applied, can that same type of product cost much less in a country many thousands of miles away?
The other night a broadcaster talked about the challenges of young people being able to not only find their first job upon graduation but also the affordability of their first home. But – these are not issues confronted by China alone. In Australia the possibility of a young person now being able to afford a traditional style house in cities such as Sydney and Melbourne is getting ever farther out of reach. Many are now turning to much smaller apartments that, let’s face it, you probably could not swing a cat in (no offence to cats and no I do not advocate swinging cats).
The challenge for China, like so many countries is to try and sure that wages keep pace with costs or costs keep pace with wages because, if they are not careful, consumers become restless.
McKinsey released a report recently that looked into the future and posed a question: what can be expected from the Chinese economy in 2014? This is what they came up with:
Productivity Growth and Technological Disruption – China will look to control rising costs in labour, land and capital in order to ensure higher productivity. The country will also focus on disruptive technologies including online banking and other ways to use the Internet effectively in China.
Chief Information Officers, or CIOs – In order to fulfil its technology goals, Chinese companies will have to hire qualified CIOs.
Jobs Over Growth – The Chinese economy has been growing at an impressive pace but the country needs to create more jobs in order to ensure higher productivity.
Mergers and Acquisitions – A focus on mergers and acquisitions will be essential to the Chinese economy in 2014. “Private and foreign participation is increasingly encouraged in many parts of the [logistics] sector, and its competitive intensity is likely to rise,” says McKinsey director Gordon Orr.
Buildings Infrastructure – Many commercial and residential structures are decaying despite China’s architectural prowess. Orr believes that the government needs to focus on rebuilding certain cities with terrible infrastructure.
High-Speed Rail – China will focus on increasing the capacity in popular lines of its high-speed rail over adding new lines in 2014.
Solar Power Industry – The solar power industry will be essential to the Chinese economy thanks to growing domestic demand. This demand can be partially attributed to the Fukushima nuclear power plant disaster in Japan.
Brick and Mortar – Many brick and mortar retailers are expected to go out of business due to the rise of online retailer.
Free Trade Zones – There are questions surrounding the future of China (Shanghai) Pilot Free Trade Zone. Orr says that Shanghai might ease Free Trade Zone limitations but he believes it’s unlikely to happen.
European Soccer in China – Rupert Murdoch invested in the Indian football league, and Manchester City’s Qatari investors injected cash into a new football franchise in New York City. Why can’t the same happen to the Chinese Super League in China from Chinese administrators?
Google’s former Greater China CEO Lee Kai-Fu recently said “the cost of start-ups in China has never been so low and nowhere else is this as evident as Zhongguancun (Beijing) which sees more than 4,000 start-ups annually. Interestingly enough it is here that global meets local. Microsoft, Google and more than 40 other of the world’s top 500 have research and development centres based there to create what is a super hub of innovation and incubation. Now, having been in Bangalore (home to electronics city) only a few months back, there are lessons India could learn from this sort of set-up. I didn’t see a lot of incubation in Bangalore but in Zhongguancun I saw it in droves.
After leaving Google Lee established a tech incubator called Innovation Works and, since 2009, it has become one of the largest businesses of its kind in China.
Perhaps, however, the bigger story is how Beijing is going further in bringing ideas to life. The nation’s capital has launched an initiative called the “maker” season which is open to the general public who might have ideas that can be incubated and grown into business opportunities. More to the point the platform that has been developed by the Beijing Science and Technology Commission not only brings ideas to life but connects entrepreneurs with support and – importantly, potential investors.
What does all of this lead to? Well, if you provide budding entrepreneurs with a sense of hope, aspiration and opportunity you find they will flock to you in droves thereby building industries and jobs of the future. It only takes a handful to create next Lenovo, Huawei or Alibaba. One of the last remaining challenges for China will be to re-look at its interaction with social media because if these home-grown businesses are to really flourish offshore they will need to have a presence on platforms such as Google +, Facebook and Twitter and if they can’t access those sites then it may in fact take longer for them to grow. But, credit to the new administration of President Xi Jinping where continued economic reform is being ramped up and China’s institutions of yesteryear continue to learn how to operate in what is an ever smaller global economy.
So, while I lament the Beijing I first found all those years ago I don’t mind the progress.
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