Chinese market nodrm by Law Hiu

Money

Chinese Market

Money: Chinese Market China’s market offers unprecedented opportunities. It contains a population of over 1.3 billion in the world’s second largest and strongest growing economy. Through trade liberalisation and the deregulation of its economy China has utilised its low cost labour advantage to dominate world trade in simple manufactured goods. With an average growth of 7-8% over the last decade China has been able to restructure its economy towards higher value added manufactured products. This has resulted in rapid increases in percapita incomes. These increases may be illustrated by the increased share of electrical machinery, telecom, office machines and metals in China’s export mix at the expense of apparel, textiles, footwear and toys. While initially driven by export growth, the increase in per-capita incomes has resulted in China’s domestic market becoming the major growth contributor for the first time in 2008. With currently almost 80% of urban households considered poor, this rising income is estimated to bring 300 million households into the middle class by 2025. Already considered “the world’s factory”, this rapidly emerging domestic market is expected to become the driver of world consumption. In order to supply its strong export sector and meet the demands of its domestic economy, China is becoming the key marketplace in the world economy. Currently China’s global trade exceeds US$2.1 trillion each year, importing US$922 billion and exporting US$1.19 trillion. The strength of its export sector, particularly in manufacturing which accounts for 80% of exports, is illustrated by the US$268 billion dollar surplus it holds with the US. This strength has positioned it as a strong market for international capital investment with US$74.8 billion invested in 2007. While China’s strong economy provides incentive for foreign investors there are a number of concerns about the security of investments. Examples of these include poor intellectual property rights, government subsidies for domestic companies and a stock market which segments foreign and domestic investors. The government is however striving to improve investor confidence through policies such as further trade liberalisation, stronger property rights and World Trade Organisation accession. With China’s potential and increasing investor confidence it is becoming an increasing strong market for foreign investment. To meet the increasing demand for its exports and to satisfy growing domestic demand China has become a major import market in the world economy. Through the government’s continued reduction of administrative obstacles to trade such as tariffs, subsidies and exchange rates controls, imports have increased by 25% since 2000. Machinery and transport equipment make up the majority of imports, accounting for 43%. This is followed by chemical products at 11.3%, mineral and raw material at 11% and textile, rubber and metallurgical products at 10.8%. A large portion of these products are inputs for China’s export sector and hide strong import increases in domestic consumer market goods. While China accounts for 4% of global GDP it represents 16% of the World’s metal consumption. It consumes 35% of world iron ore and produces more iron than the US and Japan combined. China is Australian’s biggest export market and its demand for Australian exports continues to grow rapidly. In 2009 Australia’s top exports to China included 21.7 billion Australian dollars in iron ore, A$5.6 billion of coal, $A1.3 billion in wool and A$1 billion in copper. Also primary products such as natural gas, canola, live animals, fish, wine and meat have experienced strong demand growth from China. 1

www.iminds.com

With an increase in urban households average disposable income of 800% from 1991 to 2007 China holds strong potential from Chinese and foreign businesses alike. Furthermore as US consumers reduce spending due to the financial crisis, and consumers in the Western EU continue to reduce spending as their populations rapidly age, demand in these countries will fall. Foreign companies will be forced to penetrate the Chinese domestic consumer market in order to maintain profits for shareholders. The Chinese market for durable goods has increased rapidly in recent years. The percentage of households with personal computers increased from 6% to 47% since 1999. China also has the world largest mobile telephone market with 650 million subscribers. The market for automobiles is also growing strongly with a 164% rise in the last five years to 33 million private vehicles. With sales in China exceeding the US in 2009 this market provides significant opportunity for foreign companies, particularly due to the infancy of the Chinese domestic auto industry. Growing by 950% since 1997, the Chinese market for retail products has also experienced a significant increase. The market is currently segmented into luxury products for its small high income market, and low quality products sold at street markets and government owned department stores for the large low income population. With its growing middle class however there is strong potential for businesses to offer mid-level brand name products. Recently leading international retail stores such as Metro, Wallmart, Auchan, Ikea and Best Buy have established themselves in the market through mergers with domestic department stores. These stores are however faced with strong competition in a highly segmented market with millions of street stalls and independent retailers offering low prices and often counterfeit products. Currently, the top 100 retailers in China still only account for 11% of total consumer good sales. However, with increasing incomes and a growing educated class there will be increased demand for well known products which will increase the dominance of large department store chains in the Chinese retail market. While the increasing affluence of the Chinese population is increasing consumption, it is still well below its potential. For over a decade China has had one of the highest household savings rates in the world at around 51% of disposable income. This is compared to 1.2% in the US. However the significant savings held by Chinese consumer has helped sustain demand during the recession as consumers have remained confident in their level of wealth. While the majority of these savings are held in China’s four state owned banks, as of 2006 the Chinese government has allowed for foreign entry into the financial market. This creates a strong opportunity for international banks to enter the Chinese savings market. The challenge will be to gain the confidence of Chinese consumers to entrust foreign banks with their savings. China’s low priced export sector has long served to satisfy the growing demands of wealthy western consumers. Conversely it is now China’s horde of middle income consumers who are set to drive world consumption into the future. With China steadily opening this market to the world there is considerable opportunity for western economies to serve their growing demands. This market is however significantly different from those faced in the past and foreign firms will have to adapt to China’s unique business and consumer culture in order to prosper.