ABOUT THE AUTHOR: Duncan Levesley is Senior
Manager, Research & Advisory, and Kathryn Leake is Marketing
and Communications Executive at the China-Britain Business
Council
The financial growth of China in the past 30 years has
reverberated across the world. However, the Chinese economy is
still changing, and this is creating exciting opportunities for
those who understand the trajectory of change and are offering the
goods and services to match.
Earlier this year the China-Britain Business Council (CBBC)
conducted a survey of British businesses operating in China. The
results show that UK companies are confident about their business
prospects there, with 80 per cent expecting to see revenue increase
in the coming months, and 83 per cent planning to increase their
investment. It is evident that despite the economic slowdown and
Eurozone crisis, UK companies still view China as a strong bet for
a good return on investment. So what, specifically, are the
economic and policy changes occurring in China, and how are
companies able to benefit from them?
Rebalancing China’s economy
One result of China’s economic growth has been the huge
expansion of the country’s domestic market and increases in average
wealth levels of its population in recent years. After China began
to open up to foreign investment, the first wave of international
firms used the country as a base for low-cost mass-produced goods,
altering global manufacturing beyond recognition. The warehouses of
almost every country on the planet are now filled with boxes
stamped with ‘Made in China’. But China is no longer just a hub for
cheap production.
China’s boom has brought prosperity to a lot of people. Some say
China is now home to more than a million dollar-millionaires, and
hundreds of billionaires. Rather than a base for exports, companies
are now finding domestic markets for their products, and an
increasingly wealthy and discerning consuming class.
This wealth is overwhelmingly concentrated in China’s eastern
coastal cities. China may have 274 cities with a population of over
a million, but just four of these cities – Shanghai, Beijing,
Guangzhou and Shenzhen – account for about 30 per cent of all
wealthy consumers.
“Growth in personal wealth will lead to greater demand
for wealth management”
However, China’s latest five-year plan aims for more equitable
wealth distribution across the country, particularly to inland
regions. In addition, as trade has made the east coast rich, the
five-year plan is designed to help rebalance the economy away from
export and investment-led growth to greater dependence on domestic
consumption. There are a range of policies to foster this, but part
of this process will include making more diverse financial products
and services available to consumers. The implementation of the
current five-year plan is likely to be integral to China’s future
development. By 2015 China is expected to hold the world’s
fourth-largest concentration of wealthy people, and in the next
five to seven years three-quarters of the growth in the number of
China’s wealthy consumers is expected to occur outside the largest
metropolises.
Changes in business environment
The rebalancing of China’s economy and the desire to increase
individual wealth levels have led to important changes in China’s
business environment. In the past, China’s growth was fuelled by
its vast surplus of cheap labour, but social and population changes
mean that this surplus is now drying up, and employees demand
better pay and greater benefits for their work. While this loss of
cheap labour means that China may begin to lose its role as the
factory of the world, the country’s growing consumer market and
shift away from export-led growth present exciting opportunities
for the service sector.
As China’s domestic consumer market grows, it is becoming more
discerning about brands and product quality. When appraising the
performance of Chinese companies, respondents to the CBBC 2012
business survey highlighted competitive pricing as their main
advantage. In contrast, UK companies view their most significant
competitive advantage to be in product quality and design. As the
Chinese consumer market grows in wealth and sophistication, quality
will become a much greater asset than cost, and again this will be
a boon for UK companies. Given that China’s retail sales are
expected to reach USD10 trillion by 2020, a size similar to the
current market of the Eurozone, the opportunities will be
immense.
Wealth management
Notably, growth in personal wealth will lead to greater demand
for wealth-management products and services. At the start of
China’s reform and opening up, the monopoly of the major state
banks essentially served as government coffers, used by officials
for projects of their choice. China’s financial sector has
diversified and become much more market-led in the past 30 years,
but it is still under-developed and dominated by the banking
sector, particularly the large state-owned banks.
The opportunities in wealth management are already impressive,
particularly as many wealthy Chinese people hold a diverse range of
assets offshore. Also, as financial reform takes hold alongside
economic reform, expect capital controls to relax and demand to
grow for more sophisticated onshore products.
What do Chinese people look for in wealth management? In terms
of investors, customers generally value relationships, prefer
hands-on advice, are price-sensitive and don’t like paying for
intangible advice if they can’t see the clear value. They also
often choose multiple wealth managers.
Private banking is dominated by the big banks, and domestic
banks in particular. However, these domestic banks are often
limited in the services they can provide due to regulation and lack
of experience, particularly of international issues – though they
are catching up quickly. Likewise, the legal profession has
historically had less exposure to opportunities, markets and
practices overseas. In the short to medium term, this means
domestic banks and lawyers will often need to cooperate with
international partners to offer the services their clients require.
The CBBC has helped to introduce some of these companies to UK
firms, with whom they are now working for mutual benefit.
Impressive opportunities
China’s economic rebalancing is creating some impressive
opportunities. As the CBBC 2012 business survey results show, UK
companies already operating in China expect to see business and
profitability increases this year. The CBBC has engaged with China
for 60 years, and for many of the companies we help the opportunity
has never been greater. As China enters this new stage of
development, we hope to see more companies work with us to use the
lessons from the past and knowledge of the present and immediate
future to take full advantage of the numerous business
opportunities to be found there.