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Understand China to understand its opportunities

China is transitioning from a low-cost economy to a value-added, technology-driven country.

This has implications for New Zealand companies setting up business in China, with clear opportunities for those offering expertise in productivity improvement.

The importance of lifting productivity is spelt out in two just-released EY reports “Rethinking profitable growth: the productivity imperative for foreign multinationals in China” and “China’s productivity imperative

Lifting productivity is the only way to offset the impact of slowing revenue growth and rising costs. That means companies must dramatically improve their internal processes to deliver products or services with fewer inputs, along with targeting customer needs more effectively. 

Those insights can also be applied to New Zealand businesses.

Excellent growth opportunities still exist for New Zealand businesses in China in the technology and green space.

Those with expertise in these sectors benefit not only from expanding their markets but can also qualify for incentives offered by the Chinese government.  In addition, New Zealand offers tax exemptions for the active offshore businesses.

But New Zealand business must be prepared to invest for the long term rather than looking to China as an immediate solution to the demands and pressures businesses are currently under.

China’s leaders clearly recognise the importance of productivity to China’s economic future. A key objective of their twelfth five- year plan is to shift China toward consumption-led, efficiency-focused growth.  The Chinese government therefore wants to implement input -factor market reforms in line with the current five-year plan’s binding targets to lift average incomes and increase resource efficiency.  

China has experienced a huge increase in both labour and commodity costs in the past five years.  Labour costs have increased the fastest, with average wages more than doubling since 2007. 

These cost increases are expected to continue due to the introduction of mandatory employer social welfare contributions, moves to increase the minimum wage, rising employee expectations, and the increased cost of living.

The mass reallocation of labour from low productivity agriculture to higher productivity manufacturing is coming to an end and the EY reports that the current slow down in China is not just a result of the Global Financial crisis, it is also due to China exhausting its gains from the first generation policy reforms.   Even though there are 320 million labourers still employed in agriculture it is estimated only around 20 million of those will move to the cities.

With the earlier rounds of market liberalisation and privatisation having largely run their course the drive is on to move from labour and capital driven economic growth to productivity improvements.

What is also clear from the report is while China has been very successful in creating indigenous national champions in a number of high technology industries, with the most well known of these industries being in telecommunications, high speed rail transport, information technology, auto assembly, and an emerging civil aviation sector, there is still a long way to go in terms of productivity improvement.  

Critical areas for New Zealand businesses to be aware of as outlined in the report are:

  • The five year plan for China targets a lower growth rate of 7 percent per annum.   The intention is that growth will be more sustainable and efficient.  More growth is expected from domestic consumption, with an increase from 35.1 percent of GDP to 40 percent by 2015.
  • The five year plan specifies that income per capita will rise at least an annual average of 7 percent in real terms per year.  This result is a burgeoning middle class with the resulting demand that this will generate and also more pressure on companies to increase labour productivity to offset the wage inflation.
  • Binding targets have been set to reduce energy and carbon intensity, to eliminate the loss of arable land, reduce water consumption per unit of industrial value added, and increase forest coverage.  The proportion of fossil fuels and energy consumption to GDP is targeted to decline. 
  • China expects to have innovation-driven changes with seven strategic industries selected – non fossil energy, environmental technology, new fuel powered vehicles, new materials, high-end manufacturing, biotech pharmaceuticals, and information technology.  The contribution to GDP from these industries is expected to increase from the current 3 percent to 8 percent in 2015 and to 15 percent by 2020.  This will be supported by increased research and development spending from 1.75 percent to 2.20 percent of GDP.  There will also be Government funded incentives for companies to upgrade their technologies and move up the value chain.

By matching and understanding this huge economic shift that is and will take place in China, New Zealand companies will be best placed to match what we can offer and make the most of these enormous opportunities.

Joanna Doolan is the chairperson and Florence Wong is the leader of EY New Zealand China Business Group.

Joanna Doolan
Partner, Tax (Auckland)
Tel: +64 9 300 7075

Florence Wong
Senior Manager, Tax (Auckland)
Tel: +64 9 377 4790

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