Blog


China’s Transition: A Tale of Two Economies

May 05, 2016
   
   

Last year was not the best for the Chinese economy. A lack of communication on the part of leadership, devaluation of the renminbi and the crash of the Chinese stock market all took a toll on investor sentiment. Since February, however, there has been a subtle shift. The economy seems to be stabilizing, the housing market appears to be recovering and the “new economy” is zooming ahead. 

What is the new economy? “Entertainment, travel, the internet, consumption,” Jing Ulrich, JP Morgan Chase managing director and vice chairman, Asia-Pacific, said during the Global Conference session “China’s Future: The Sky Is Not Falling.” While the heavy industries are suffering, the new economy  grew 47 percent last year.

Alibaba, Tencent and Baidu represent the top tier of China’s new economy, but there is a plethora of smaller — if lesser known — high-growth, high-value companies. Neil Shen, founding managing partner of Sequoia Capital China, attributes the success of these companies to three factors: strong entrepreneurship, the large Chinese consumer market and technology. Moreover, the regulatory environment has been very supportive of new economy companies, he said.

Shen points out that one of the unique characteristics of these booming Chinese companies is that they “tend to expand their scope as they grow.” As an example, he cites the phenomenon of online companies such as Alibaba extending their reach offline once they establish their ability to acquire customers online. The reason for this, he says, is the underdevelopment of some brick-and-mortar sectors.

The lack of penetration of credit cards among Chinese consumers allowed Tenpay and Alipay, the financial services arms of Tencent and Alibaba, to disrupt the offline payment market in China by enabling customers to pay for products and services at small convenience stores and restaurants using their mobile phone instead of cash or a credit card.

In the old-economy-versus-new-economy debate, Neil Shen says it’s still unclear who is coming out on top in the battle for market share. More certain, he said, is that homegrown Chinese companies have been gaining market share while foreign companies’ share has fallen.

Stephen Roach, senior fellow at Yale’s Jackson Institute for Foreign Affairs, who made the first to take a bullish view of the Chinese market back in 1995, said that China is doing something that no large economy has ever done before: “reinventing itself as a consumer.” The challenges in this transition stem from the fact that the country’s central planners have difficulty understanding human psychology, and thus how to transform  consumer behavior, he said.

Roach puts forward this core thesis: China needs confident consumers.

China’s current anti-corruption campaign will be an important foundational development that will provide a greater sense of security for the future. But demographics present a huge challenge. Many young people are becoming the  sole caretaker of their parents, as well as their grandparents, thanks to the  one-child policy that has been in place since 1972. The fear instilled by this heavy financial burden  has led them to save rather than spend on consumer goods.

China’s previous producer model played directly into the sweet spot of central planners, but to change consumer behavior, officials need to “relax,” Roach said. They need to foster an environment that inspires confidence and encourages consumers to behave in a way that is consistent with a more positive perception of the future.

 AsiaChina

Comments

No one has commented on this page yet.

Post your comment