How do you plan as China progresses into the new era?

China has introduced a series of important policies and institutional arrangements in the pursue of high-level opening up.

T
he year 2019 marks the 70th anniversary of the founding of the People’s Republic of China. It also leads us toward another significant milestone – the building of a moderately prosperous society in all respects by 2020. Against this backdrop, China has introduced a series of important policies and institutional arrangements in the pursue of high-level opening up. China has also become an advocate for international trade liberalization and economic cooperation.

Chinese businesses remain bullish in economic outlook

Despite the changing external economic and market environment, Chinese businesses remain optimistic about China’s economic growth overall, showing that China’s economy stays resilient and a series of policies on deepening reform and opening-up has eased economic and trade pressures.

According to the EY Global Capital Confidence Barometer, 90% of respondents from Greater China remain positive about China’s economic growth and 68% of Chinese executives expected revenue to grow by 6%-15% in the next 12 months.

Moreover, market adjustment is inspiring enthusiasm of Chinese companies for mergers and acquisitions. According to the survey, 89% of Chinese executives expected Chinese merger and acquisition (M&A) market to improve in the next 12 months and 42% of Chinese executives expected to pursue M&As in the next 12 months, up from 34% in 2018.

China is prepping for a “new long march”

China becoming an open and transparent market place

China’s balance of payment no longer structurally distorted

The International Monetary Fund (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[1]:

• Narrowed current account surplus
• Resilient capital flow as the financial market opens
• Stable RMB against a basket of currencies
• Next steps in high-quality opening up

China sets to become the world’s largest consumer market

• Massive income growth in past decades: The average disposable income of China’s urban residents increased by around 623% over the past 20 years, which led to significant increase in welfare in terms of spending ability[2]
• Robust asset value appreciation has led to wealth effect that dramatically diversified China’s consumer spending behavior
• China’s imports from BRI countries/regions are growing faster than those from the G3

The final steps in China’s balance of payment liberalization

• Promoting service imports beyond tourism and education
• Regulatory environment conducive for opening-up
• Opening up of the capital market

In our view, the opening up will not only inject new blood to China’s financial market and reduce the pressure on the RMB but will also increase the competitiveness and maturity of the financial market.

From open market to future-oriented economic system

EY report Megatrends shaping 2018 and beyond: the upside of disruption introduces an analytic framework on understanding future trends, suggesting technological development, demographics and globalization as primary driving forces of future trends and disruptive changes. Interactions among all these forces will impact the future of economics, society and international politics and define what they will look like by shaping the future and driving disruptive changes with emerging technologies, demographics and globalization trends.

Human augmentation, aging population and globalization 4.0 act as the most recent dominant drivers. Given China’s industrial structure, development goals and demographics as well as its integration into the global system these three drivers are variables to China’s future development.

The above three variables constitute a great part of China’s internal and external development environment and direction in the future. The following three key opportunities will be vital to the development direction of China’s future-oriented economic system:

New urbanization

• Clean energy and new materials
•  Intelligent transportation and infrastructure
• Health care
• Education and training

Energized innovation ecosystem

• Next-generation information technology
• High-end equipment
• New materials
• New energy
• Energy conservation and environmental protection
• Biomedicine

Personalized consumption era

• Manufacturing
• Retail
• Logistics
• Education
• Health
• Entertainment
• Digital infrastructure
• Information technology

Adaptive regulation for a future-oriented economic system

Disruptive technologies and new business models have an impact on the relevant regulatory systems in many ways. As one of the most active innovation markets in the world, China faces particular challenges in this regard. It is vital to consider how to implement reasonable and appropriate regulation without damaging the innovation power and market vitality, taking into account the interests of various market entities, especially the interests of consumers, laborers and SMEs, promoting high-quality development for China in the future and building a future-oriented economy.

Conclusion

Amid rising external uncertainties, China’s large domestic market underpins sustained growth. As the country continues to promote structural adjustment and financial reform, increase domestic demand and create a new landscape for opening up, a strong domestic market will bolster China’s economic growth and create great opportunities for other countries and foreign companies.

China is entering a crucial stage of continued reform and development. As such, decision-makers need to thoroughly consider economic, social and technological trends for the years ahead. In addition, they need to formulate industrial development plans, continue the development of the regulatory regimes, cultivate and retain talent, support innovation with more inclusiveness and high transparency, and manage risks and uncertainties.

Meanwhile, companies need to gain deeper understanding of China’s economic and social structure and opportunities in future, enhance communication with decision-makers on industrial planning and regulations. In addition, companies need to expedite adoption of new technologies and foster value-added products and services that increase customers’ confidence and tap into their potential needs.

Deepening reform, expanding opening up and building a future-oriented economic system will mark the start of a new journey of China in the new era.