CBME China 2024

17-19 July 2024 | National Exhibition and Convention Center (NECC), Shanghai, China

| EN

How should foreign enterprises view China

The following article is originally published by FT Chinese. Source:  https://mp.weixin.qq.com/s/OyemRQz64evtftxQ3NlzLw

“Foreign enterprises need to adjust their perceptions and understand that the Chinese economy has entered a period of profound transformation” —- Wang Dan, chief economist at Hang Seng China

Many people, especially foreigners, believe that the year 2020 marked the beginning of a downturn in China’s economy. However, this is not in line with the facts. After the outbreak of COVID-19 in 2020, China was the first to control the spread of the epidemic on a global scale. The domestic economy experienced a brief halt in June of that year, but from July onwards it rebounded sharply, with consumer confidence hitting historic highs. The world’s dependence on Chinese manufacturing did not decrease but increased, with records set in manufacturing investment, exports, FDI, and real estate transactions and prices. At that time, there was widespread optimism about the future, which led to a 2 trillion yuan increase in real estate investment in 2021.

The real turning point in the economy occurred in 2022. Despite the shocks brought by the pandemic response, adjustments to real estate policies were the main cause. By the end of 2021, the Central Bank and the Ministry of Housing and Urban-Rural Development led a deleveraging movement among real estate firms, gradually covering all developers and commercial banks. In 2022 and 2023, real estate investment fell by almost 2 trillion yuan per year (1.5 trillion in 2022 and 2.2 trillion in 2023), while manufacturing investment increased by 2 trillion yuan per year to fill the gap (according to official growth data estimates, an increase of 2.2 trillion in 2022 and 1.7 trillion in 2023). The overall economic growth rate seemed unaffected, but the growth engine had shifted from real estate-driven to manufacturing-driven.

This economic structural adjustment means a change in policy response. In the past, when faced with economic downturns, the conventional operation was to stimulate domestic demand, such as the “Four Trillion Yuan” stimulus in 2009 in response to the global financial crisis, which stimulated infrastructure and real estate through significant easing of monetary policy and fiscal measures. At present, however, policy emphasizes “transforming old and new drivers of growth,” “high-quality development,” “new quality productivity,” and “patient capital” — all of which focus on enhancing technological strength rather than stimulating domestic demand. Therefore, from 2022 to the present, there has been no substantial loosening of monetary or fiscal policy, with policy efforts concentrated on supporting industrial upgrades.

Facing China’s economic structural adjustment, foreign companies need to adopt new measures. We believe there are three trends worth paying attention to.

First, low inflation and low consumption will be a long-term phenomenon in China, not just a short-term problem.

Foreign enterprises serving the Chinese market must have differentiated products and protect brand premiums to avoid price wars.

Consumer confidence plummeted like a cliff from April 2022 and has not yet recovered. The willingness to consume, employment expectations, and income expectations of consumers are all at historical lows since 1990. This includes the impact of the pandemic response, but the negative impact of the real estate downturn is even more significant. According to research by Southwestern University of Finance and Economics, in 2018, 78% of Chinese residents’ wealth was in real estate, with less than 1% in the stock market. After this, the contribution rate of real estate to household wealth continued to rise until it began to decline in the second half of 2021. This was partly due to depreciation in housing value and partly to a reduction in home buying plans. The real estate contraction broke the channel for household wealth accumulation. Before finding alternative investment channels, individual families must guard against economic risks with a higher savings rate, which will also lead to slower consumption.

Overcapacity is just the surface; the underlying issue is the loss of demand. However, real estate can no longer be an engine of China’s economy. Over the past two years, in addition to policy measures to control risks, the government has never tried to bring the property market back to its peak. Despite repeated easing of restrictions such as purchase limits and lending caps, similar policy measures are ineffective in reviving the real estate market. The banking sector’s “two red lines” policy on real estate enterprises and the developers’ “three red lines” policy have not been canceled, the guiding policy of “housing is for living, not for speculation” hasn’t changed, and the trend of falling housing prices remains unchanged.

This means that real estate will undergo a long period of asset revaluation. The shrinkage in property values in small cities will be much greater than in big cities. A declining birthrate will also fundamentally limit future real estate demand. Vendors targeting the mass market will have to continue price wars, and only by focusing on high-end urban markets can profit growth be secured. The core of the value chain for premium brands is still in the hands of Western enterprises.

Second, geopolitical pressures will continue to drive Chinese companies to go global, and anyone who can facilitate this transition will benefit.

With the expansion of US sanctions against China, Chinese companies are increasingly valuing overseas direct investment. Before the US-China trade war, Chinese manufacturing companies generally had no need to go global, even moving to Southeast Asia to take advantage of cheap labor was done on a small scale. However, after the expansion of the sanctions, the requirements for the country of origin from European and American buyers have increased, forcing many Chinese companies to increase overseas investments. Yet many companies have also discovered previously ignored opportunities. Domestic demand is insufficient, and price wars are squeezing profit margins. Overseas investment involves more complex compliance and country risks, but product prices are higher and the return on investment, in the long run, may be higher than the domestic market.

In recent years, the main directions for Chinese companies’ overseas layout have been Southeast Asia, Latin America, and the Middle East. For example, new energy vehicle companies (such as BYD and Changan) have built factories in Thailand and Mexico, and appliance companies (such as Midea, Haier, and Gree) have extensively laid out in BRI countries. The outward investment of a core business will drive its suppliers to move outwards. Foreign companies often occupy key nodes in the supply chain in materials and special equipment, and establishing long-term cooperation with Chinese companies is crucial because technological innovation at one point in the chain may change the product demand in multiple stages, strengthening the linkage between upstream and downstream of the industry chain helps to occupy a place in key innovations, as well as seize the initiative for overseas expansion.

Europe is another hotspot for Chinese overseas investment. At present, coinciding with the final stage of the EU’s anti-dumping and anti-subsidy investigations into Chinese electric vehicles, the implementation of new tariffs will prompt a new round of Chinese enterprises to head to Europe. The legal and compliance risks of the European market are far higher than those of the emerging market countries, and only the most competitive and well-prepared companies can stay. If the strategy does not work out, they also need to be able to adjust quickly. Recently, Great Wall Motors decided to close its European headquarters in Germany in August and canceled plans to open a battery factory in Germany, deciding instead to invest more resources in other countries such as Russia, Brazil, and Thailand because its European strategy has been unable to proceed smoothly. Going global requires continuous market research, new information, and the search for new supporting suppliers. Globalized foreign companies have rich experience and a deeper understanding of many markets compared to newly arrived Chinese companies. Becoming a supplier and information provider for China’s new generation of globalized companies will also provide new opportunities for multinational corporations.

Third, China’s supply chain and innovation capability will only strengthen over time.

For foreign companies, implementing an overly de-signification strategy carries the risk of long-term backwardness.

Foreign enterprises in China face fierce local competition, which is one of the main reasons for the recent outflow of foreign capital. The competitiveness of domestic brands has risen rapidly, continually squeezing out the market share of foreign capital. This phenomenon is particularly evident in industries such as electronics, smartphones, and electric vehicles. In government projects, the requirement for domestic procurement percentages is also increasing, promoting import substitution. Many foreign enterprises face an existential crisis.

However, even in the current competitive situation, the best strategy for foreign capital is not to exit China. On the contrary, foreign enterprises should strive to join the Chinese supply chain to maintain competitiveness. China’s leading position in e-commerce and the new energy industry chain has fully utilized China’s scale effect and existing infrastructure for continuous innovation. Live streaming for sales, brand promotion, and the integration of complex industry chains have driven multi-level technology applications. In terms of basic scientific research and development, China undoubtedly lags Europe and America, but in the “last mile” of application fields, the Chinese market remains the world’s largest testing ground.

For most of the time since its reform and opening-up, China has been in a phase of imitation and catching up with the West. Now, China has gained international competitiveness in industries such as new energy, electronics, and machinery manufacturing, and even possesses the world’s most advanced technology in some segments (such as batteries). Cooperation between Western and Chinese companies may be the choice that best serves long-term interests. For example, CATL and Ford Motor Company have formed a joint venture to build a factory in Michigan, with Ford responsible for operations and CATL providing technology. This is the first case in history where a Chinese company has provided technology to a Western company. The cooperation process was not smooth. Ford, seeking Chinese technology, faced political pressure in the US, causing the project to halt at one point. By the end of 2023, the battery plant resumed construction, although the production scale was reduced by 40%. This case shows that even in the context of heightened competition between China and the US, there is still room for cooperation between the two sides.

In summary, foreign companies need to adjust their understanding and recognize that the Chinese economy is entering a period of deep transformation. They cannot overly rely on the experiences of the past 40 years to judge the future. Political and economic cycles will put pressure on foreign enterprises, but whether it’s the sanctions imposed by the United States on China, or Europe’s “de-risking” efforts against China, they all have their practical limitations; Europe and the United States cannot completely decouple from China. The market scale and industrial chain advantages of China will continue to exist in the long term. China’s substantial investment in high-tech will enhance its innovation capability. If companies excessively decouple from China, they may fall behind in the next phase of competition or even be eliminated from the market.


International maternity and baby tradeshow dates
Maternity and baby tradeshow sponsorship opportunities
Shanghai CBME 2024 business forums