Is China’s Market Hot Or Cold?
As a country with a population of 1.38 billion people (august 2016) across a vast number of cities, the Chinese market experiences increasing uncertainty when deciphering its market as hot or cold. While peripheral views on China’s industries seem unclear, certain industry sectors have flourished in the last year while others are on the decline.
Due to the large number of investment options available, the optimisation of gains and profits is the key objective to consider. Currently, Technology and Financial Services are two extremely popular industries to invest in, hence, the large popularity of the financial technology field. Data from 2015 stated that the High Technology and the Financial Services sectors’ strategic buyer deal value totalled $148.6 billion USD, a $78.3 billion USD increase from 2014 due to high expectations for the Technology industry for 2015 as shown in the graph below1. The development of financial technology and payment businesses have caused these sectors to advance significantly within the past year.
Technology and Financial Services
The rise of both the Technology and Financial Services sectors is attributed to multiple factors. Government support greatly decreases the perceived risk of investing in those fields1. Thus, more individuals are likely to create a new start-up, developing a thriving community of new technological innovations. Although a booming technology industry can reap an enormous amount of benefits, it also has a significantly higher risk rate. In China, over 10,000 firms are created on a daily basis in the start-up community with Technology and Internet as the two most popular sectors2. From the large pool of new businesses, about 90% of start-ups fail (based on 2013 data)3. The largest contributing factor to the high failure rate is unwanted products and services offered by the new businesses4. As a result, the odds of a start-up becoming successful is extremely slim.
With regards to the Financial Services sector, prominent drivers in this field include the expansion of Chinese banks abroad as well as domestic payment companies1. Domestic payment companies such as WeChat, Alipay, Tenpay, 99bill, and government-owned UnionPay are all part of the developing mobile payment service that is gaining rapid popularity5. Overseas banks support China’s external infrastructure through an increase in global activities conducted by domestic customers. Additionally, more domestic payment companies will expand to obtain internal and external business transactions. Though expansion is emphasised in this sector, the process of restructuring the domestic market is needed to optimise efficiency and functionality.
On the other hand, industries experiencing a decline include the Textile, Luxury, and Construction sectors. The Textile industry saw a drop in investments in 2015, mostly due to fluctuations in exchange rates and more importantly, the stark contrast in labour costs since the industry is a labour intensive sector. Labour costs are four to five times less expensive in Southeast Asian countries than in China, hence the outflow of work6. In correlation to Textiles is the Luxury industry. As an attempt to reverse the decline that occurred in the second half of 2015, a number of luxury brands expanded their product lines to include children’s apparel for their target audience. The industry also utilises the retention tactic of recreating exclusivity with limited edition apparel collections.
Besides the waning number of investments in the Luxury and Textile sectors, the Construction industry also experienced a downfall in 2015 due to the decrease in the construction of real estate7. However, with the help of the One Belt One Road initiative, construction activities will increase again as demand goes up for the construction of roads to connect with neighbouring countries and ultimately increase trade interactions8. Thus in the future, the Construction sector will become a more viable investment.
Since labour has been a key asset for many of China’s industrial sectors, China is now shifting towards automating the manufacturing process in order to increase the efficiency of the production process and to reduce long term costs that are associated with factory workers. Consequently, about 100 million workers will be displaced in the future, and will need to find new jobs9. Currently, China is still in the development stage of introducing more robots in the workplace, but the progress is slower than expected since the robots’ capabilities are limited since they can only perform their function when the items are positioned precisely.
China has work to catch up with the rest of their competitors at a technical level. Multiple countries have been using automated machines within their industries. South Korea is the top contender of automation with 478 robots to 10,000 workers while Japan, Germany, and the United States have 315, 292, and 164 robots respectively. On the other hand, China’s ratio is only 36 to 10,000. This effort to surpass other countries using automation is an objective for China over the next few years. In 2014, China was the largest market purchasing industrial robots, stated by the International Federation of Robotics10. With the boom in technology, robotics and automation are important sectors in the field to advance China’s technological capabilities.
Investment in Europe
While all five of these industries are mostly internal to China, the Middle Kingdom has been heavily investing in Europe for the past six years11. The peak value of investments made by Chinese investors in Europe was $23 billion. Europe’s overall economic stability is of high value to Chinese investors. Other explanations for the preferences in European investments include Europe’s exclusive, unique blend of enterprises in addition to amicable political relationships as a collective whole and as individual countries. Europe is currently a desirable option for investments. However, the lack of reciprocity and regulatory issues has created scepticism and emerging pessimistic views from European companies investing in China.
The ‘Smart City’
The growth in the Technology sector has contributed to a new idea known as the “Smart City” concept. The term “Smart City” is the utilisation of network systems and databases to resolve the issues that arise in urban areas via remote control and access12. The Smart City concept entails linking various services such as public transportation times and finding available parking spaces all to a smartphone. Thus, when visitors arrive in the city, they are able to be accommodated instantaneously. The Smart City not only emphasises accessibility, but also places a focus on the creation of a more environmentally friendly city. Taking measures to reduce a city’s carbon footprint leads to sustainability and improved standards of living for all residents in the long run.
The Smart City concept entails linking various services such as public transportation times and finding available parking spaces all to a smartphone. Thus, when visitors arrive in the city, they are able to be accommodated instantaneously.
The push for the “Smart City” concept was bolstered by the 13th Five-Year Plan13 issued in 2016 by the Chinese government in which initiatives are created to be implemented within the next few years. These proposals range from varying fields such as finance, defence, environment and rural development, etc. Technological innovations paired with eco-friendly practices are two important objectives that China is striving for to reduce the nation’s overall level of pollution. Interest in these industries will increase as a result of the government’s encouragement, which is crucial to continuing the country’s economic growth for the next five years.
Since innovation is one of the priorities for China’s upcoming growth in the next few years, there are a number of cities that are currently growing. From the 2015 report, the top contestant for the best city (Tier 1) of opportunity is Guangzhou14. The other top cities (Tier 2) included, Shenzhen, Hangzhou, Nanjing, Wuhan, Chengdu, Suzhou, Xi’an, Xiamen, Tianjin, Qingdao, and Changsha. Most of these cities have the geographic advantage of being located in eastern coastal regions which are prime hubs for international business. While Beijing, Shanghai, and Hong Kong were not directly evaluated in the 2015 report, they were ranked 14th, 13th, and 11th respectively in a global study.
Hospitality, Travel, and Leisure
The number of growing cities creates the perfect opportunity for increasing business within the Hospitality, Travel, and Leisure industries. Due to the rise of China’s middle class, travelling and leisure activities have increased dramatically, and as a result, the Hospitality industry has been experiencing a higher level of activity. The two types of travel, inbound and outbound, greatly influence the sector. Currently, outbound travel is much more favourable due to large improvements in China’s standard of living and increasing amounts of consumption15.
As a result, more people have the financial resources and time to travel abroad. Popular destinations include South Korea, Japan, Thailand, France, Italy, Switzerland, Germany, USA, Singapore, and the Maldives. On the other hand, there is a decrease in inbound travel due to the appreciation of the RMB in addition to fluctuating exchange rates. Concerned views on corruption and issues such as food security and air pollution all contribute to the waning inbound travel to China. Lastly, domestic tourism has also helped Travel and Hospitality industries. Cities experiencing major tourism traffic include: Beijing, Shanghai, Guangzhou, Xi’an, Hangzhou, Hong Kong and Macau – as they are home to famous historical and urban sites.
Since the 2008 Olympics and 2010 Shanghai Expo, the number of hotels in China has gone up dramatically. Many of these hotels are now spreading to the middle-tier cities after starting in the top-tier cities such as Beijing and Shanghai16. These new hotel establishments are also aligned with the rise of China’s middle class and their prominence in China’s economy. China’s middle class is one the largest demographic of domestic and international tourists worldwide. American hotel chains have an abundance of opportunities to cater one of the world’s largest growing group of travellers. As a result, the hospitality industry is booming.
In conclusion, China’s current overall market is relatively hot. With the start of the implementation process of China’s 13th Five-Year Plan, innovation and technology go hand in hand with a more sustainable, environmentally-friendly trajectory. With the aid of tourism and the Hospitality industry, the sectors identified all are yielding positive results. In general, following the target markets selected for investment by the Chinese government will decrease the amount of risk. Having a varied portfolio is a necessity so that risk and assets are all diversified. Several industries are on the rise and in the progress of advancing China’s economy, while some are currently in a slump, creating a mixed view of China’s market depending on the angle that it is being perceived.
- Brown, David, and Christopher Chan. PwC M & A 2015 Review and 2016 Outlook. Rep. N.p.: PwC, 2015. Print
- Wang, Yanfei. “‘China Should Embrace Startup Industry’ – Expert.” China Daily.com.cn. N.p., 28 Jan. 2016. Web. 5 July 2016. http://www.chinadaily.com.cn/china/2016-01/28/content_23293183.ht
- “The R.I.P. Report – Startup Death Trends.” CB Insights. N.p., 18 Jan. 2014. Web. 5 July 2016. https://www.cbinsights.com/blog/startup-death-data/
- Patel, Neil. “90% Of Startups Fail: Here’s What You Need To Know About The 10%.” Forbes. Forbes Magazine, 16 Jan. 2015. Web. 05 July 2016.
- Wu, Nan. “China a Gold Mine for Online Payment Platform System Companies.” South China Morning Post. N.p., 11 May 2015. Web. 05 July 2016. http://www.scmp.com/tech/innovation/article/1792222/china-gold-mine-online-payment-platform-system-companies
- Zhu, Wen Qian. “China’s Textile Exports Decline in 2015.” China Daily.com.cn. N.p., 14 Jan. 2016. Web. 5 July 2016.
- Lau, Jessie. “China’s Construction Sector Forecast to Slump to Historic Lows: No Recovery Expected Until 2030.” South China Morning Post. N.p., 10 Nov. 2015. Web. 05 July 2016. http://www.scmp.com/property/hong-kong-china/article/1877354/construction-declines-china-shifts-industrial-sector
- Pitlo, Lucio Blanco, III. “China’s ‘One Belt, One Road’ To Where?” The Diplomat. N.p., 17 Feb. 2015. Web. 05 July 2016. http://thediplomat.com/2015/02/chinas-one-belt-one-road-to-where/
- Knight, Will. “China Is Building a Robot Army of Model Workers.” MIT Technology Review. N.p., 26 Apr. 2016. Web. 06 July 2016
- “Welcome to Market Realist.” The Rise of Factory Automation in China. N.p., n.d. Web. 06 July 2016
- Jones, Claire. “Chinese Investment in Europe Hits $23bn Record.” Financial Times. N.p., 10 Mar. 2016. Web. 05 July 2016. http://www.ft.com/cms/s/0/c1155e72-e5e0-11e5-a09b-1f8b0d268c39.html#axzz4DVPhebp3
- Johnson, Don. “Smart City Development in China.” China Business Review. N.p., 17 June 2014. Web. 05 July 2016. http://www.chinabusinessreview.com/smart-city-development-in-china
- Hong, Wendy, Dr., Denise Cheung, and David Sit. “China’s 13th Five-Year Plan (2016-2020): Redefining China’s Development Paradigm Under the New Normal.” China’s 13th Five-Year Plan (2016-2020): Redefining China’s Development Paradigm Under the New Normal (2015): 1-27. Web. 5 July 2016. https://www.fbicgroup.com/sites/default/files/China%E2%80%99s%2013th%20Five-Year%20Plan%20%282016-2020%29%20Redefining%20China%E2%80%99s%20development%20paradigm%20under%20the%20New%20Normal.pd
- Lu, Mai, and Dennis Nally. Chinese Cities of Opportunity 2016. Rep. N.p.: PwC, 2016. Print.
- “China Tourism.” Statistics and Data. N.p., n.d. Web. 06 July 2016. https://www.travelchinaguide.com/tourism/
- DiChristopher, Tom. “The Rising Middle Class Fuels Hotel Boom in China.” CNBC. N.p., 7 Apr. 2013. Web. 7 July 2016. http://www.cnbc.com/id/100443819