With 2016 approaching, it’s clear that China’s domestic economy has entered a new phase in its development. In her latest monthly update, Frontier Strategy Group’s senior China analyst, Danyi Yang, advises clients:
With the domestic market facing continued weakness in industrial production, but steady growth in retail sales, China has set an average growth floor target of 6.5 percent for the period of 2016-2020. Given that economic slowdown is inevitable during China’s economic transition, and that completing the shift successfully is unlikely to occur in the next 5 years, setting a relatively high growth target for the market is dangerous. Companies need to be prepared for the potential risk of the Chinese leadership reversing market liberalization efforts to achieve short-term GDP growth targets. This ultimately will impact the country’s pace of economic rebalancing in the long term.
Despite an increasingly challenging environment at home, the outlook for Chinese global investment continues to gain momentum each year. What was once a story of primarily state-led natural resource investments in emerging markets has changed dramatically in recent years. Today, Chinese companies from industries as diverse as consumer goods, internet, entertainment, real estate, manufacturing and chemical production are all going global – and these are not just state-owned enterprises. In fact, private companies lead the way in many of these industries.
I witnessed this phenomenon first hand when I spoke at the 2015 China Outbound Forum in Sanya, China in late November. The forum, a closed door gathering of several hundred Chinese executives and government officials from across the country, was one of the more diverse China business conferences I have participated in. While there were executives from well-known Chinese global firms such as Fosun, Alibaba, Sany Group, Lenovo and ZTE, there was an equal number of lesser known peers with a strong desire to ‘go global’ in 2016.
It was interesting to observe the interactions between executives representing both sides. Executives from the lesser known companies were eager to learn how to become “the next Lenovo” or “the next Huawei”. The experience reinforced my belief that Chinese executives need more success stories to learn from in order to get it right the first time and avoid costly mistakes. For the most part, the greatest challenges Chinese executives face in expanding overseas result from their own inexperience abroad – not overseas government interference as is often portrayed in the mainstream media.
Beyond interactions with these Chinese executives, the forum also offered insight into the ambitious One Belt, One Road (OBOR) initiative. The Co-Chairman of the China-Pakistan Economic Corridor Council spoke about the implementation of China’s $46 billion investment in Pakistan. Several energy projects are already underway, and China and Pakistan are collaborating to develop a series of Special Economic Parks to encourage Chinese companies to move production to Pakistan. Anecdotally, I spoke to a senior commercial service officer from the Pakistan embassy in China who commented that the number of direct flights between Beijing and Pakistan has increased dramatically in recent months. The officials on the OBOR panel recognized that each country along the New Silk Road Economic Belt and 21st-Century Maritime Silk Road will require a unique approach, but Pakistan will serve as an initial model to learn from as implementation expands over time.
Regardless of whether we look at Chinese businesses or the Chinese government, there is a clear recognition among all parties involved that increased internationalization is an essential part of China’s evolving economic model. 2016 will surely have a new set of previously domestic-focused Chinese companies burst onto the international stage.