6 minute read 3 Apr 2020
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How will China strengthen its economy in the next decade

By EY Greater China

Multidisciplinary professional services organization

6 minute read 3 Apr 2020

China is seeking to upgrade its domestic consumption and further open up its market to stimulate growth through its new economy.

T
he year 2019 saw further progress of China moving toward the milestone of achieving a moderately prosperous society by 2020. Achieving this goal is not without challenges, but the Chinese government has repeatedly reiterated its determination to continue to reform and open up its market for foreign players to participate.

To prepare the economy for continued growth, the country is focusing on three key drivers: becoming an open and transparent market; augmenting humans – particularly the aging population – with technology; and upgrading the economy.

These megatrends are shaping the Chinese market.
These megatrends are shaping the Chinese market.

These initiatives made a strong start in the past few years but uncertainties that have recently arisen in the domestic and external environment, including the Covid-19 outbreak and the US-China trade tension, have raised questions about the attractiveness of China as a market for foreign participants. On the other hand, China is continuing to demonstrate strong fundamentals that will help boost global confidence in the health of its economy.

Becoming an open and transparent market

China is set to become the world’s largest consumer market, driven by a population that has rapidly increased its spending power. According to the National Bureau of Statistics of China, the per capita disposable income of Chinese residents was RMB30,733 in 2019[1], a massive 20-year increase of 425% from RMB5,854 in 1999[2], which has led to a significant increase in wealth in terms of spending ability. Robust asset value appreciation has led to a wealth effect that has dramatically diversified the spending behavior of Chinese consumers. The aspiration for a better life has driven an increase in imports, with a larger portion coming from emerging markets in the Belt and Road economies.

2019 per capita disposable income of Chinese residents

425%

increase from 1999

In terms of stabilizing its currency, despite some skepticism, from the US in particular, China’s effort was recognized by the International Monetary Fund (IMF). The IMF has reaffirmed that China’s balance of payment is no longer distorted and the RMB exchange rate is broadly in line with economic fundamentals. A gradual opening up with government supervision will facilitate a resilient flow of capital and keep capital outflow pressure relatively low.

To liberalize payments and encourage foreign investment, China’s government has implemented several measures. First is the Foreign Investment Law (FIL) announced in March 2019. This law streamlines the government approval process and establishes a comprehensive investment service system that provides information about laws, regulations, and policies for foreign investors. It also strengthens intellectual property protection and safeguards the freedom to remit capital.

Second is the release of the new version of the national and Free Trade Zone (FTZ) negative lists in June 2019. The government has further relaxed restrictive regulations in order to enable foreign investment to enter various industries. The new negative lists allow majority foreign ownership or wholly-owned foreign enterprises to participate in subsectors including agriculture, services, mining and manufacturing.

Foreign players across sectors can expect to benefit from China’s further opening up within a regulated market environment. Technology will continue to support the transformation of the economy towards high-quality growth.

Augmenting humans in an aging population through technology

Human augmentation is a major driver in the transformation of the way in which people in China are living and working. This is achieved through the further integration of technologies – such as artificial intelligence (AI), augmented reality (AR), virtual reality (VR), blockchains, sensors, and biotechnology – into daily life.

The innovation ecosystem has been a focus of China’s development. According to the data released jointly by the National Bureau of Statistics, the Ministry of Science and Technology and the Ministry of Finance, investment in research and experimental development in China in 2019 was RMB2,173 billion, up by 10.5% from 2018.

China is making great strides in the field of AI development. According to the Ministry of Science and Technology’s 2019 China New Generation Artificial Intelligence Development Report, by the end of 2018, China had 3,341 AI companies and led the world in number of AI research papers published[3].

This AI expertise is helping to process large volumes of data and is assisting people to explore new business models and lifestyles. By analyzing the needs of customers, AI can help to personalize consumption and keep up with the massive demand from the huge domestic consumption market. An example of this application is during Alibaba’s Singles Day global shopping festival in 2019, where AI and cloud helped to process orders totaling USD38.4 billion over a period of 24 hours[4].

The mix of information technologies will also enable innovative products and services, such as driverless cars, wearables, drones, and robots. Furthermore, these advanced technologies will be needed to address the issue of an aging population. As China transitions into a new era, the elderly (people aged above 60) will account for an ever-increasing proportion of the population, while the working age population will decrease. According to the National Health Commission, the number of elderly people is expected to reach 487 million by around 2050, representing 34.9% of China’s total population.

Upgrading the economy

In light of the measures taken to further open up the market to foreign investment, as well as the need to integrate various advanced technologies into everyday life, China is undergoing a transition of its economy to one that is more hi-tech and services focused. This will be conducive to foreign investment and support.

A factor that underlies this upgrade is the opportunity created by new urbanization. The rate of urbanization has continued to rise, reaching 60.6% by the end of 2019, up 1.02% from 2018[5]. This increase represents a massive new market of people who are entering the urban economy each year, driving the development of cities and their surrounding areas.

The China International Import Expo

To showcase its achievements in the above areas and its other opening-up initiatives, China held its first large-scale import expo in 2018.

The China International Import Expo (CIIE) is the world’s first import-themed national-level expo that shows a government’s support for the transition of the economy from a period of high growth to an era of high-quality development. Through a combination of further opening up the market, integrating technologies, and upgrading the economy, China looks set to create a sustainable path for a new era.

The second CIIE held in 2019 showcased China’s ongoing advocacy for the liberalization of international trade and for support for foreign investors despite a slowdown in globalization. The event was attended by delegates from more than 181 countries, regions, and international organizations, and more than 3,800 enterprises, resulting in over US$71.13 billion in intended deals signed. It also highlighted opportunities arising from regulatory support for the transition to a new economy.

  • Show article references#Hide article references

    1. www.stats.gov.cn/english/PressRelease/202001/t20200119_1723719.html
    2. www.stats.gov.cn/english/statisticaldata/yearlydata/YB2000e/J03E.htm
    3. www.xinhuanet.com/tech/2019-05/24/c_1124539084.htm
    4. technode.com/2019/11/20/amid-b2b-shift-singles-day-is-also-a-showcase-for-alibabas-tech
    5. www.stats.gov.cn/english/PressRelease/202001/t20200117_1723398.html

China is set to become the world’s largest domestic consumption market, and its transitioning economy is making it easier for foreign investment to enter the country. Through advanced technology and opening up, China is upgrading its economy for a new era.

Summary

Against the backdrop of a slowing global economy, China is continuing to develop into a more open and transparent market. The country is set to upgrade its economy and become the world’s largest consumer market.

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By EY Greater China

Multidisciplinary professional services organization