18 January 2018

China Emerges As A Global Innovation Hub

Key themes emerged from HSBC’s China Connections event in Shanghai in October, when businesses from around the world gathered to explore growth opportunities in China.

In recent years the center of global economic growth has moved decisively eastward, with China playing a leading role in the nascent global economic recovery as traditional powerhouses like the United States and Europe struggle to gain momentum.

By some estimates, the world’s second-largest economy accounted for over 30 percent of total global growth from 2011—2015, and in 2015 was responsible for over 10 percent of both global imports and exports.1

From high-profile overseas investments by Chinese companies to the new infrastructure that China is funding across Asia to revitalize trade under the Belt and Road Initiative (BRI), signs of the country’s emergence as a leading growth hub are everywhere.

While this situation has been positive for the global economy, it also means that the stakes are high, in that a sharp slowdown in China could have far-reaching consequences. Economies and markets tend to be highly sensitive to any possible signs of economic stress in China, whether a dip in GDP numbers or a weakening of the country’s currency, the renminbi.

But such short-term market developments shouldn’t mask the broader truth that China is undergoing a transformation that will power continued growth, and place the nation on a more stable and sustainable footing, for decades to come. And this transformation will continue to generate opportunities for businesses that develop the right approaches to a vast and dynamic market.

While the country’s GDP growth rate has moderated in recent years, it’s important to keep the numbers in perspective. As Noel Quinn, Chief Executive, Global Commercial Banking, HSBC, notes, many of China’s 660 cities are still growing rapidly, with the nation approaching a “tipping point” of $12,000 GDP per capita that signals an exponential takeoff fueled by a swelling middle class.

In addition, as Natalie Blyth, HSBC’s Head of Global Trade and Receivables Finance, points out, China’s households are typically less indebted than those in the West—another sign of a global migration of wealth and purchasing power to Asia. This means China’s future growth will be led by consumption and trade in services, rather than the resource- and labor-intensive manufacturing of decades past.

Innovation takes a lead role

Beyond consumption, other, often complementary growth drivers are emerging. China is one of the top national investors in research and development, and it has cultivated the world’s largest e-commerce market, demonstrating that “the time of innovation-powered growth in China has arrived,” says Frank Fang, Head of Commercial Banking, China at HSBC.

This shift has also been noted by acclaimed economic analyst and forecaster Pippa Malmgren, who predicted both the Brexit vote result and Donald Trump’s victory in the U.S. presidential election. Ms. Malmgren believes that China’s rapid adoption of electronic payment has put it at the forefront of a global migration toward a digitally based financial system.

At the same time, China’s government is actively building new growth opportunities, most notably through its Belt and Road Initiative, aimed at improving infrastructure and trade links between China and Europe. This represents a “completely new strategy for generating GDP,” Malmgren says, which paves the way for exports of high-value brands and services, such as railway technology.

Lessons for businesses

All these forces make it likely that China will be an even more important element of global supply chains and expansion plans going forward. How, then, can companies best position themselves to seize the opportunities China will present?

The first step is to acknowledge that succeeding in China often requires being on the ground. In the words of Sandeep Uppal, HSBC’s Head of International Subsidiary Banking, Asia Pacific, it’s important for a company’s senior management to visit China “before they show up to cut the ribbons” for the opening of a local office.

Choosing and nurturing the right local partners is important, as is acknowledging that, more often than not, “a contract is never going to capture all aspects of your relationship,” cautions Uppal; everything from pricing to management arrangements may need to be renegotiated or adjusted regularly.

Enterprises also need to make allowances for Chinese consumers’ expectations and preferences, which can differ considerably from those in other markets, notes Alexis Bonhomme, co-founder and Manager of digital marketing firm Curiosity China. For example, Chinese buyers often seek to engage a brand’s customer service representatives prior to purchase, rather than afterward (and only if there’s a problem), as in the West.

Imported brands tend to do best when they tap into Chinese consumers’ focus on heritage, security and quality, particularly in verticals like healthcare and baby goods, he says. However the bar is higher in industries where the offerings of local companies are perceived as just as good if not better than those of foreign brands, such as consumer electronics.

Companies would also do well to remember that the Chinese market is increasingly aspirational and driven by the desire for new experiences, according to Daniel Lamarre, President and CEO of Canada’s renowned Cirque du Soleil.

Cirque du Soleil is putting the country at the heart of its international expansion, because “the future of live entertainment is going to be designed by China,” he says. In the entertainment industry in particular, success requires understanding the government’s viewpoints and objectives, differentiating foreign brands from local offerings and acknowledging that China is a digital and mobile-first market. Cirque du Soleil is investing more in social media outreach in China than in any other market.

Mind the gaps

Beyond potential cultural barriers, businesses looking to tap into China’s growth face a number of possible challenges—as does China’s growth trajectory itself. These include security threats; a resurgence of protectionism; and funding gaps, as rising compliance costs convince more banks to withdraw from trade finance—a phenomenon that HSBC’s Blyth says points to the need for a “collective rethink of the entire trade finance architecture.”

However technology also promises a possible solution to many of these issues, by leveling the playing field. China’s vibrant social media and e-commerce landscape means that SMEs can enjoy the kind of broad access to the market previously reserved for multinationals. Apps like Tencent’s WeChat and emerging fintech solutions also have the potential to bring more transparency and efficiency to financial transactions, and trade and supply chain processes, making them “faster, cheaper and safer,” Blyth says.

Perhaps most importantly, HSBC’s Quinn explains, in China the authorities have shown determination to ensure that infrastructure evolves in tandem with the needs of the business community, and to tackle the country’s growth challenges head-on.

“I’m very positive on China because Beijing is not afraid to take decisions, and it’s unique in that it has the ability to execute those decisions and transmit them to the economy very rapidly,” he says. “With that approach, whatever problems you confront, you can work your way through them.”


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1China’s growing contribution to world economy


This article was published in Bloomberg on 5 December, 2017.

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