China’s Economy

Forty years ago, after a long period of economic stagnation, China was not in the world’s top eight economies. Today, thanks to a breathtaking social and economic transformation that began in the late 1970s, China is on track to overtake the United States as the world’s number one economy within a few decades, if not sooner. By some measures, it has already done so. We are living in what many are now calling ‘The Chinese Century’.

China’s economy is the second-largest in the world, behind only the United States. But after three decades of spectacular growth, China is now moving into a slower growth phase – an inevitable result of its transition from a developing economy to a more mature, developed economy. In the 1980s, 1990s and early 2000s, China’s annual GDP growth frequently exceeded 10 per cent, with an estimated 2019 growth of 6.3 per cent, although this is likely to be closer to 6 per cent with the impact of the US-China trade war.

In coming years, the International Monetary Fund (IMF) forecasts China to continue growing at a rate of 6.3 per cent in 2019 and 2020 and 6 per cent in 2021. These forecast figures still put it well ahead of most other major economies’ growth rates and keep it on track to eventually overtake the US as the world’s largest economy. Manufacturing, services and agriculture are the largest sectors of the Chinese economy – employing the majority of the population and making the largest contributions to GDP. Since 1949, the Chinese Government has been responsible for planning and managing the national economy. But it was only after 1978 – when Deng Xiaoping began market-based reforms –that growth began to take off, averaging 10 per cent annually for some 30 years. During that period, the size of the Chinese economy grew by roughly 48 times, from USD 168.367 billion (current prices) in 1981 to USD 11.01 trillion in 2015.

Since the introduction of Deng Xiaoping’s economic reforms, China has what economists call a socialist market economy – one in which a dominant state-owned enterprises sector exists in parallel with market capitalism and private ownership. It was the active encouragement of private enterprise from 1978 that enabled China to kick-start the long expansionary boom that continues today. Private businesses now produce more than half of China’s GDP and most of its exports. They also create most new jobs.

The irresistible rise of China has implications and consequences for us all on so many levels and it largely comes down to one word: opportunity. For Australia, and Australian businesses in particular, has there ever been an opportunity like China?

Under the socialist-market model, the Chinese Government plays a direct role in managing the economy through its five-year plans that set goals, strategies and targets. The five-year plans in the 1980s and 1990s focused on market-oriented reforms, while the past two five-year plans have focused on promoting more balanced growth, better wealth distribution and improved environmental protection. The current five-year plan focuses on increasing China’s competitiveness through more efficient and increasingly advanced manufacturing on the east coast, attracting labour-intensive manufacturing to central provinces and increasing domestic demand.

Economic growth, which has in recent decades been driven by export-led manufacturing, is now becoming more reliant on domestic consumption. The resulting increase in consumption spending represents a major opportunity for Australian businesses that are able to successfully target their products and services to an increasingly affluent Chinese public. There is also encouragement for foreign businesses to invest in key areas such as advanced manufacturing, energy saving, environmental protection and modern services. Tightened regulation on energy conservation and environmental protection also presents an opportunity for Australian businesses.

The perception of China since the 1980s as a predominantly low-cost manufacturing hub, where it effectively served as an inexpensive producer for global brands, is changing as the economy grows. Increasing labour costs and an ageing workforce have caused manufacturers’ pro t margins to decline steadily. As a result, while cost rationalisation is still an attractive feature of the China market, global and local businesses are now starting to change strategies to tap China as an engine for growth. Currently, approximately one-third of global business leaders rank China among their top three regions for generating growth over the next year.

Businesses contemplating establishing operations in China should be aware that, despite long-held perception, average wages in China have been climbing on the back of the country’s economic emergence, to the point where it is less a low-cost hub as it is a dynamic and complex economy. However, the recent cooling of the Chinese economy has blunted the wages surge after a double-digit increase in 2009, as noted by the International Labour Organisation. Nevertheless, average real wages in stateowned and other urban-based enterprises grew by 9 per cent in 2016, while those of workers in private enterprises climbed 8 per cent in 2016. Reflecting the Chinese ‘boom’ was the more-than trebling of the average annual salaries of city workers from RMB 14,000 in 2003 to RMB 74,000 in 2017. Accompanying this new wealth, however, were sharply increased living costs.

For Australian businesses, opportunities in China have sprouted across a huge – some might even say bewildering – range of industries, market sectors and geographic locations. Rapidly rising income levels in China and mass migration from rural to urban areas have created an abundantly large class of urban consumers demanding improved housing, a cleaner environment, overseas travel, better education, a higher protein diet and an enhanced choice of financial services. From the sophisticated consumers of developed cities such as Beijing, Guangzhou and Shanghai, to the growing middle classes in lesserknown inland cities, the newly industrialised China is a veritable smorgasbord of opportunity.

This is not to say that doing business in China is without unique challenges and complications. Apart from language and cultural barriers, which can be considerable, foreign businesses must navigate issues ranging from complex bureaucracies, challenges in intellectual property (IP) law enforcement, to quality control and the sheer, overwhelming size and diversity of the country. There is also the overarching challenge of the different way that business is conducted in China compared with other countries, the large and highly competitive market for both domestic and foreign businesses, and the complexity of understanding and selling to the Chinese customer.

The rewards can be immense for Australian businesses willing to put in the necessary preparation and hard work to address these challenges and successfully establish in China. The Chinese Government has continued to introduce policies aimed at raising standards and encouraging more trade and investment, both inbound and outbound.

Want to learn more? Explore our other China information categories or download the China Country Starter Pack.