China and the World – Six Things to Know About Doing Business

China – specifically, fear of China – is once again top of mind for business leaders.

Perhaps that’s not surprising, given the supremely challenging business environment, overheated political rhetoric, and, not least, this very difficult pandemic year.

But that trepidation is misguided. Perceptions of China are severely distorted in the current climate. They’re also dramatically out of date. Business leaders who want to innovate and drive growth in the coming decade should not fear China – they should embrace it.

The current wave of China aversion is not only the result of current events and inflammatory statements by world leaders. It’s also a consequence of too little recent contact. Too many leaders have not been in China for too long a time. Too many journalists have never been there. The consequence is a perception of China that’s frozen in 2005 – a manufacturing-focused economy dominated by state-run enterprises, and with limited respect for IP. Fear of competition from China blends with intense mistrust.

To think that way about China, however, is to run the risk of missing out. Not only is China a large and growing economy, but it is also transformed and transformative. It is an innovation driver. To fail to engage with China is to run the risk of falling far behind on innovation and global competitiveness.

To understand what’s really going on in China – and why engaging with it is so important – here are six things you need to know:

• China is on the rebound from Covid-19. In fact, it’s the only large country in the global economy that’s growing. While the initial impact of the pandemic was devastating, public health measures led to containment and a quick economic recovery. China will be a major global growth contributor in 2020-2021 and for the next decade. Its growth in 2020-2021 is 2-3 times more than the globe combined – being the only main growing economy, China grows more than the rest combined shrinks. In the decade 2020-2030, China will contribute approximately 25% of global GDP growth. By 2030, it will account for one-fifth of the world’s economy. China is already or on the brink of becoming the largest market in many sectors. So how robust is China? Auto sales shrank in 2020 compared to 2019 – but at half the global rate. Fashion and luxury goods grew at a rate of 20-30% year-over-year, while the rest of the world shrank by 25-45%. Energy consumption grew by 1.1% while the rest of the world’s declined by 9.5%. 
• China is an innovation driver – of both business models and technology applications. Especially when it comes to the digital economy, B2C business and business model innovation, China is ahead of the world. New ecosystems and business models come to life often first in China, and they come to life quickly. Livestream shopping combines livestreaming and e-commerce with dramatic results. In one instance, livestreaming generated sales of 310 RMB ($47 million US) for an air-conditioner brand in a three-hour period. In the midst of the pandemic, e-commerce joined to cold-chain logistics has resulted in a fresh-produce ecommerce boom, generating an annual growth rate of 45%. Innovation in China encompasses technology applications – prospective real-estate buyers routinely tour properties via virtual reality, and consumer electronics production lines in the Shenzhen OEM cluster scale from prototype to small-batch production in a matter of days. Technology investment capital is pouring into China, especially in the Guangdong-Hong Kong-Macau Greater Bay Area (GBA) with over 70 million people. From 2017 through the first half of 2020, total technology investment in the GBA is 135% of that in Silicon Valley, and China is building a strong advantage in such areas as next-generation AI, where investment also outstrips U.S. levels.
• China’s economy is changing – from export and investment to consumption and innovation. Yes, China was once the world’s factory – an export-focused manufacturing center – and was driven by massive investment in infrastructure. But that doesn’t describe China today. China’s present and future is one of domestic consumption, driven by a rapidly growing middle class. In the first decade of this century, investment accounted for 53% of China’s GDP growth, while consumption was 45%. But in the coming decade, investment will only drive 22% of the GDP growth, while domestic consumption will contribute 78%. And consumption isn’t the whole story: China is also shifting toward a service-based economy where innovation will play a significant role.
• Trade war and decoupling will continue – and will have multiple consequences that need to be reckoned with – but they won’t necessarily slow down development. Political and economic pressure on China will continue even under the new Biden administration in the U.S. Expect a continuation of trade barriers in some form, and continued pressure for economic decoupling. Globally, business factors will remain in play – such as pressure, driven by both geopolitics and the pandemic, for a more geographically diversified supply chain. But supply-chain diversification will still leave China as a major supply-chain component, and overall, China’s growth is sufficiently robust and broadly distributed that these frictions are ultimately not likely to limit it significantly. The emergence of China’s consumer market will attract new waves of investments, more imports, and China continues to promote the opening up of its economy. Its engagement with the EU, already significant, will continue to grow. China and the EU have just reaffirmed their goal of concluding a new bilateral investment agreement by year’s end, and they have agreed to bolster cooperation on green development and the digital sector.
• The 14th Five-Year Plan is on the way – it will drive focus, investment, and growth opportunities. The plan extends previous themes of opening up and urbanization – but with new focus on innovation, consumption, and the green economy. Rapid economic growth will be de-prioritized in favor of the quality of the economic system. In short, the plan reinforces growth drivers already in place. Among its most significant objectives and potential policy directions: the development of high-tech industries that are strategically important, for example semiconductors; the expansion of the middle-income group to nurture a strong domestic market and generate a “dual-circulation pattern” where domestic and foreign markets boost each other; and a commitment to eco-friendly work and life, with a renewed pledge to meet the Net-Zero 2060 emissions target, with a steady post-peak decline in carbon emissions.

• China’s future is green – China and climate together are a sweet spot. China’s commitment to the Paris Accord and the Net-Zero 2060 pledge will drive massive investment and innovation – and drive partnership. Expect opportunities to invest and engage with China on clean energy, decarbonization technology, and green transportation. Europe currently plays a major role as a result of the Paris Accord and of China’s determination to expand its EU relationships. But a U.S. recommitment to the Paris Accord will spark U.S.-China opportunities as well.

The relationship between China and the rest of the world is complex, and there will be multiple factors to navigate, ranging from trade to broader geopolitical tensions to differences in views on governance models and human rights. Business leaders engaging with China should not proceed with a sense of na?ve enthusiasm. But China’s transformative growth means that the time is right to expand engagement with China. The way to do that is to put aside irrational fears and archaic perceptions – and go forward in a clearsighted way, understanding what China is today and what it promises to become.

About the Authors

Lars Faeste is a Managing Director and Senior Partner in BCG. He leads BCG’s Greater China business and also leads BCG’s Turn and Transformation practice area in Asia Pacific. You may contact him by email at [email protected].

Fang Ruan is a Managing Director and Partner in BCG. She is the leader of BCG’s People and Organization practice area in Greater China and Asia Pacific. She also co-leads BCG Henderson Institute China. You may contact her by email at [email protected].

Ted Chan is a Managing Director and Partner in BCG. He is the leader of BCG’s Global Advantage practice area in Greater China and BCG’s Transportation and Logistics Sector in Asia Pacific. You may contact him by email at [email protected].