A rocky year is in store for the Chinese market, as the country experiences greater competition, lower economic growth, and major shifts in consumer behavior. Though most businesses in China are expected to hold to their current strategies, 2015 will present them with a host of new challenges and opportunities. Here’s some of what we can expect to see as the year progresses:
Lower Consumer Confidence
Disposable income has been on the rise among China’s consumers for the past few years, but is expected to drop precipitously in 2015. We will most likely see “the lowest annual income growth in China for at least a decade, with knock-on implications across the economy,” according to Gordon Orr of McKinsey & Company. Workers’ expectations of continued income growth will lead them to “price themselves out of the market,” and they are also being replaced by technology, particularly in service industries and the manufacturing sector.
For these reasons, consumers’ financial confidence will fall, leading to lower spending and overall market growth. Data suggests that consumers are already spending less; Nielsen recently reported an increase of only 3 percent in annual purchases of fast-moving consumer goods, and Tingyi, a food and beverage company, noted a 13 percent decline in turnover during the third quarter of 2014.
Big changes are also in store for China’s job market. While working for state-owned enterprises was once considered ideal, the private sector has now become “the driver of job creation in China.” Unfortunately, the majority of the country’s 2015 college graduates will be unprepared for these shifts, and will face flat starting salaries and find fewer positions requiring a degree upon entering the job market. “The way forward for most is finding employment in the private sector, services, or small and midsize enterprises, or becoming an individual entrepreneur — none of which average students have been prepared for by their education or their family,” Orr says.
Since appealing investment options in China are also expected to decline, consumers are expected to increasingly invest in Hong Kong-listed companies through the Shanghai-Hong Kong stock-exchange connection in 2015. Though a high minimum investment and a low awareness of available stocks are currently keeping prospective investors at bay, we can expect to see a boom in stocks over the next year.
China will continue to be a major player in the global market in 2015, and competition will heat up among the world’s governments as they vie for the attention of Chinese tourists and outbound investors. Visa offers, such as the United States’ new ten-year multi-entry visa, will become commonplace, and investment paths to a passport or permanent residency will also draw Chinese travelers.
The airline industry is also seeing major growth in response to Chinese consumers’ changing international travel habits. Shanghai, Beijing, and Guangzhou are no longer the only cities with overseas connections; direct flights to major global cities from second- and third-tier Chinese cities, such as Wuhan, Changsha, and Hangzhou, are becoming the norm, with dozens more expected to be launched over the next year.
Increased Impact of Rule of Law
International companies will become more aware of how government reform in China applies to their business practices in the country. They will “more fully recognize that anticorruption initiatives and rule of law with Chinese characteristics are long-term foundational elements of this leadership’s platform — they’re not optional, and they’re not going away.” Anticorruption investigations could hamper any number of enterprises in 2015, and business leaders should proceed with caution.
Though anticorruption efforts are here to stay, we will see changes in the government’s practices, as it “standardize[s] more of its approaches to decision making on business and regulatory issues” and increases its technological leverage to “monitor, audit, and impose sanctions on bad behavior, from tax avoidance to overly aggressive entertainment of government officials.”
Innovation and China are often thought of as mutually exclusive, but the country is quickly becoming a leader in Internet-enabled business. Multitudes of investors from Silicon Valley are visiting China to learn from its companies’ examples, because their technological advancements are having global impacts.
China’s industrial sector, so long associated with the production of cheap goods, is now developing products of an exceptional quality. By listening to what consumers want, Chinese companies in fields such as medical tech, electronics, pharmaceuticals, and telecommunications equipment are becoming true global leaders and vying with Fortune 1000 competitors.
Sources of economic growth in China will be limited in 2015, since consumption has accounted for over half of all GDP growth during the past few years. Since consumers are spending less, the GDP will also drop. Property investment, another significant driver of GDP growth (historically about 15 percent) will probably also suffer this year, as excessive residential supply in urban areas has led to price stagnancy. Infrastructure investment will most likely remain stable, as it falls directly under the control of the government. Exports are also unlikely to make the situation any better.
image credit: trey ratcliff