With a population of 1.4 billion people and GDP of over $14 trillion, size alone makes China a global player. But this is just one reason all eyes are on this nation. As the first country to make an economic recovery from COVID-19, China is soon to be world’s biggest economy. And China’s influence is multifaceted, immense, and evolving, from innovation to infrastructure to consumer trends and beyond.
While a complete analysis would fill volumes—and require updates as soon as it’s published—some highlights follow on what global businesses should watch related to China: a shifting trade and investment landscape, regional trends and influence, impact on production and innovation, and presence in key sectors such as automotive, retail, and healthcare.
THE TRADE AND INVESTMENT LANDSCAPE
Shifting policies, growing influence—and opportunities
Even companies that do not do business directly with China may find operations supported by Chinese-funded infrastructure or impacted by new free trade agreements. Meanwhile, as China turns its economic policies inward, opportunities open up for international companies.
For the past several years, China’s influence on the world outside of its borders has been multifaceted and ever-expanding. Take the Regional Comprehensive Economic Partnership, for example. On November 15, 2020, after eight years of negotiations, China and 14 other Asia-Pacific countries signed. This trade deal covers 30% of the world’s economic output and has a significant influence on goods and services, particularly finished goods, cross-border investment, electronic commerce, and intellectual property.
Since 2013, President Xi Jinping’s signature Belt and Road Initiative (BRI) has driven investment in infrastructure and energy projects worldwide, both through the Chinese government and Chinese businesses. BRI includes a sizable presence in Africa: urban developments near Cairo and Johannesburg, a Congo-Brazzaville Special Economic Zone, the A1 Autoroute in Algeria, and railways, including connections between Lagos and Calabar, Mombasa and Nairobi, and Addis Ababa and Djibouti. In Europe, China has invested in green energy and sustainability in Nordic countries and manufacturing in Central and Eastern European nations.
A shift is on the horizon, however. After seven years, 3,176 projects, and the equivalent of $4 trillion spent, Beijing’s Overseas Direct Investment (ODI) is winding down, and in 2020, the Chinese government put forth the economic policy of dual circulation.
“The Dual Circulation policy is intended to deal with fundamental weaknesses in China’s development model,” explains international law firm Harris Bricken. “China has long relied on export-led growth. But export-led growth eventually runs out of gas. The standard argument has been that to avoid the middle-income trap, any country must develop a domestic economy driven by domestic consumption.”
It’s a tactic intended to make China more self-reliant, tapping into domestic markets and internal consumption to lessen the potential impact of global economics and external events and master the shift to a demand and innovation-driven economy.
But domestic markets are just one part of the story. The other side of the Dual Circulation policy involves cooperation with other countries and the global community, specifically to boost production for exports and attract foreign investment.
Recent regulatory changes to be aware of include:
- A new foreign investment law that allows foreign companies to bid on China Government Procurement Contracts
- A new Civil Code, which took effect in January 2021, that defines privacy as a personality right and addresses the protection of personal information and people’s rights to the commercial use of their name, title, portrait, and reputation
- Updated “negative lists” for market entry, nationwide foreign investment, and investment in free trade zones, which reduce the industries for which foreign investment is restricted or prohibited and the sectors in which both domestic and foreign private enterprises can invest
REGIONAL HIGHLIGHTS
A multifaceted presence in Latin America
If you’re doing business in Latin America, China is likely part of your operations, influencing infrastructure, energy sources, and more.
Do Chinese capital plus Latin America resources create a match made in heaven? In 2010, the Chinese government seemed to think so, with a record $35 billion in state-to-state loans that year. And this trend continued throughout the decade.
From 2015 to 2019, President Xi set ambitious goals of $500 billion in trade and $250 billion in direct investment in Latin America and the Caribbean. Trade between China and Latin America grew 19% year over year in 2019 to $307.4 billion, according to Fitch Solutions, and infrastructure, telecommunications, mining, energy, and renewables projects flourished, thanks to financing from government banks, state-owned companies, private Chinese firms, and BRI.
Some examples across Latin America are:
- The Tren Maya infrastructure project and the modernization of the Dos Bocas refinery in Mexico
- The acquisition of Mexican renewable energy firm Zuma Energía by a subsidiary of China’s State Power Investment Corp.
- State Grid Corporation’s $3 billion bid to take control of Compañía General de Electricidad SA in Chile
- Lithium mining ventures in Argentina, Bolivia, Brazil, and Chile
By 2020, M&A deals in Latin America’s energy sector represented 25% of total Chinese deals worldwide. While the region’s economic challenges put a damper on Chinese investment overall—in 2020, China’s two biggest policy banks made no new loans to the region for the first time in 15 years—activity in the energy sector has far from halted. Chinese banks are investing in projects through funds or financing Chinese state-owned companies that are bidding for projects. Furthermore, Latin America remains an important market for goods and a source of essential energy and products. In the renewables sector, for example, Chinese solar panels and wind turbines are flooding the Latin American market.
Most recently, the defining theme of the China-Latin America story has been COVID-19, starting with China’s donation of more than $215 million in supplies to the region. “Without a doubt, part of the region’s COVID response has a Chinese face,” Boston University economist Rebecca Ray told US News and World Report in a February 2021 article.
While the United States has ramped up its delivery of vaccines to Latin America since then, and the pandemic unfortunately continues to evolve across the region, Chinese vaccine diplomacy has yielded some impact. China is now the destination for nearly a third of Brazil’s exports, has become the most important trading partner for Chile, Peru, and Uruguay, and has made trade inroads with Mexico.
A new playing field—with old realities—in the EU
A landmark trade deal opens up markets, joint venture opportunities, and the investment landscape for European companies. But this agreement plays out amid a complex international landscape.
Over the past year, China replaced the United States as the EU’s top trade partner. While this development was likely buoyed by strong demand for Chinese medical products in Europe during COVID-19 and strong demand for European goods in China, another factor certainly contributed as well: the signing of the EU-China Comprehensive Agreement on Investment.
The culmination of seven years of negotiations, the agreement is intended to “level the playing field rules.” According to advocates, it will increase transparency and enhance legal protections for EU investments in China and ease or eliminate joint-venture requirements in sectors such as financial services and insurance, biological resources, air transport, cloud services, real estate and environmental services, and automotive, chemical, and health manufacturing.
Companies taking advantage of these opportunities will need to mind the details, however. In January 2021, for example, new measures took effect for foreign investments, measures that include national security reviews.
PRODUCTION AND INNOVATION
Shifts in where and what products are made
China-related developments in the global supply chain will affect where international businesses outsource their manufacturing activities and the type of tasks they turn to China for, as well as trade and competition overall as China maintains a steady volume of exports.
In recent years, trade disputes, rising labor costs, and a move toward manufacturing localization have not been good for many Chinese factories.
“We have found that tariffs imposed by the U.S. and Chinese governments during the past years have increased supply chain costs by up to 10% for more than 40% of organizations. For just over one-quarter of respondents, the impact has been even higher,” Kamal Raman, senior director analyst with the Gartner Supply Chain Practice, told Material Handling and Logistics magazine. “Popular alternative locations are Vietnam, India, and Mexico.”
One way to adapt to such shifts is by redirecting efforts to higher-value goods. To this end, China has been investing heavily in technology, including artificial intelligence, robotics, and blockchain, particularly as Industry 4.0 and COVID-19 remote work accelerate the demand for electronics.
Some sectors are rebounding more than others. In electronic component manufacturing, for example, revenue in China increased at an annualized rate of 5.6% from 2015-2020, to total $302.6 billion. China is the world’s manufacturing center for TVs, computers, handsets, and other electronic devices, as well as medium- and low-end electronic components. Specialized production capacities and co-location of key suppliers, as well as economies of scale, make it difficult to shift these operations.
Overall, however, China’s sheer size and capacity give the nation a powerful competitive position. During the pandemic, China was the only country capable of increasing output on a large enough scale to meet surging demand for goods such as personal computers and medical equipment. And as China’s strong rebound remained intact, industrial output rose by 35.1% in the first two months of 2021 compared to a year earlier.
The fine balance of regulation and innovation
As China concurrently reigns in tech giants and encourages startups, evolutions in the Chinese technology sector—from essential components to emerging cryptocurrencies to online platforms—will have worldwide repercussions.
Too big, too small, just right—in its attempts to find a happy medium, the Chinese technology sector resembles the children’s tale of Goldilocks, the three bears, and their porridge bowls.
Tech giants like Tencent, Alibaba, and iQiyi (Baidu Inc.’s Netflix-like streaming service) have grown explosively and largely unfettered—until now. President Xi has called for more regulation of social media and ecommerce platform companies, and major player Alibaba may be forced to sell some of its media assets. On the global stage, regulators including the U.S. Securities and Exchange Commission have threatened non-compliant companies with ejection from their exchanges. A recent U.S. selloff, causing some firms to drop in value by more than 20%, underscored this message.
Yet in other areas of the tech sector, China is actively investing in growth. The nation’s strategic economic vision for the next five years calls for increased investment in emerging sectors like quantum computing. Companies in these targeted industries stand to benefit from cheaper loans, tax breaks, and the legitimacy of state backing.
Meanwhile, while China bans cryptocurrency exchanges and initial coin offerings, two major state projects—the Blockchain-based Service Network (BSN) and the national digital currency DCEP (Digital Currency Electronic Payment)—are advancing China’s position in the underlying technologies. BSN is creating the infrastructure and framework for blockchain applications, such as tracking shipments or authenticating documents and data. DCEP is believed to be the first step in internationalizing the renminbi and reducing China’s reliance on the SWIFT system for international banking.
Private funding for innovation has remained strong. While venture capital as a commercial activity is a relatively new concept in China, emerging only in the late 1990s, China now represents 40% of VC investments, with much of this related to major technology companies.
The semiconductor industry has been a major area of proactive focus, powering both the electronic devices of today and the innovations of the future, such as 5G-enabled solutions. Every year, China imports more than $300 billion worth of semiconductors, largely from U.S. companies. The nation is hoping to turn this equation around with vastly increased investment. In 2020, cash flowing into China’s semiconductor firms amounted to around $35.2 billion, a stunning 407% increase from the previous year.
Shaping the future of 5G
China’s pioneering 5G network stands to model what’s possible for the rest of the world, albeit with concerns over Huawei in the rearview mirror. Meanwhile, nearly a billion Chinese 5G subscribers are ready for the latest mobile innovations.
5G is the next evolution of wireless connectivity, empowering everything from advanced analytics to Internet of Things (IoT) solutions to AI and automation. China aims to build the world’s largest 5G network.
Chinese operators have invested more than $40.2 billion to date with much more to follow. China Telecom, for example, plans to almost double the number of base stations in the country. Last year, China Telecom and China Unicom deployed 300,000 5G sites across China. For 2021, the goal is full 5G coverage in all counties and in certain developed towns, rural areas, railway lines, and highways.
Chinese megacities are on the 5G case as well. According to local news agency Xinhua, Chinese telcos expect to deploy 8,000 5G outdoor base stations in Shanghai this year, accelerating the construction of smart factories, industrial IoT networks, and e-commerce platforms.
Growth in 5G infrastructure also means ample customers for 5G networks and services. With a total subscriber base of 937.16 million people, China Mobile is the world’s largest operator in terms of subscribers, and Chinese telcos added 16.94 million 5G subscribers in February 2021 alone. This means a ready, willing, and technology-capable customer base for new 5G products. China’s ZTE rose to the challenge in 2019 with the world’s first commercial 5G smartphone and has launched a wide range of 5G-enabled solutions worldwide ever since.
As for Huawei, founder and CEO Ren Zhengfei reportedly plans to expand the 190,000-employee company’s reach in enterprise services across such sectors as transportation, manufacturing, and agriculture while also amping up inverters to power its cloud services and data analytics.
CHINA’S INFLUENCE IN THREE KEY SECTORS
Automotive: A resilient leader speeds into the future
From electric vehicles to intelligent roads, China is investing in innovation. Loosened regulations and a scarcity of vital components may give international businesses an opportunity to participate.
One area where China’s booming 5G network will supercharge development is the automotive industry, specifically connected, collaborative, and autonomous driving technology.
In November 2020, China launched its New Energy Vehicle Industry Development Plan, which aims to boost the synergy of electrification, interconnection, and intelligent technology through 2035. Meanwhile, local governments are accelerating the deployment of 5G communication base stations, C-V2X roadside equipment, and intelligent roads while operators and OEMs are working to promote 5G automotive testing and demonstration projects.
These developments augment an automotive sector that’s become a global leader. At the onset of the COVID-19 pandemic, the government extended purchase incentives and tax exemptions, and China recorded the best performance among the world’s major automotive markets.
Electronic vehicles (EVs) have been a spotlight of the sector, even after China reined in EV benefits. China aims to make EVs 20% of auto sales by 2025, up from 5% now, and companies such as Tesla, Geely, and electric car start-up Nio have pledged investments to introduce EVs and raise their domestic manufacturing capacity.
All vehicles depend on readily available components, and an ongoing global semiconductor crunch threatens to impede China’s growth. In March 2021, Nio was forced to shut down its factory for five days and lower its delivery forecasts.
It’s a formidable undertaking to design and manufacture components such as automotive semiconductors that are up to industry standards. China’s Nexperia, a leader in global EV power electronic semiconductors, and Ingenic, which recently acquired US-based DRAM specialist ISSI, are rising to this challenge. In other areas of enabling technology, Contemporary Amperex Technology, one of the world’s largest EV-battery makers, is committing $4.5 billion to expand capacity at Chinese plants.
Meanwhile, a significant policy development for international businesses and investors is taking place: China will soon lift nearly 20 years of restrictions and let foreign automakers own more than 50% of local ventures. For electronic carmakers, ownership limitations will be lifting as soon as this year.
Retail and ecommerce: No apocalypse here
Brands in need of fresh markets and funding, retailers seeking stronger shopper engagement, and global companies looking for new ways to conduct businesses across borders can all look to China for inspiration and their next move.
As hallowed brands shutter and bargain chains disproportionately dominate growth trends in the U.S., China offers a dynamic vision of retail’s future.
The nation is the birthplace of massive ecommerce platforms like Alibaba and JD.com, is years ahead of the West in digital payment systems, and was an early adopter of mobile commerce, as customers skipped PC transactions and went straight to their phones to shop. The nation today has three companies— Alibaba, JD.com and Pinduoduo—among the world’s top 10 retailers and is proactively courting even more ways to innovate, delight, and separate consumers from their disposable income.
Part of this is through mergers, acquisitions, and partnerships. November 2020 marked Alibaba’s investment in online luxury fashion retailer Farfetch, for example. Private equity investors have expressed interest in smaller brands as well, especially contemporary ones that resonate with younger shoppers.
China has the IT infrastructure to support these brands with a state-of-the-art experience. High smartphone usage and ample connectivity support customer-pleasing tactics like livestreaming and one-hour deliveries. PayPal’s recent acquisition of GoPay, which made it the first foreign company to own 100% of a payment platform in China, may be a portent of things to come.
Not all ecommerce growth will be confined within China’s borders, however. China’s B2B cross-border ecommerce reported a year-to-year increase of 24% in 2020, with DHgate, the nation’s leading B2B cross-border platform, reporting a compound annual growth rate of over 60%.
Diane Wang, DHgate founder and chairperson of DHgate, cited the nation’s strong supply chain capabilities, new policy support, rich ecommerce experience, and emerging technologies such as big data and IOT as reasons why. “Cross-border ecommerce plays a more and more important role in China’s foreign trade business.”
Healthcare: a “silk road” paved with pixels and yuan
Companies eyeing the global health landscape can increasingly look to China and its Health Silk Road—which the Council of Foreign Relations calls “a rhetorical extension of China’s Belt and Road Initiative—for inspiration and innovation.
Over the past year, China extended its reach and influence into COVID-19 response. Along with being a key provider of masks, hand sanitizer, and other forms of PPE, the nation reportedly pledged roughly half a billion vaccine doses to over 45 countries. But this is just one aspect of the nation’s quest to position itself as a global health leader.
One area is in technology. During the pandemic, China has required some citizens to download an app that shares health, location, and travel data with local authorities, with Chinese technology leaders and local governments collaborating to roll out these systems nationwide. COVID-19 also spurred an uptick in online consultations and pharmaceutical sales. JD Health, a unit of JD.com Inc., saw sales jump 76% year over year in the first six months of 2020, and Alibaba Health posted a 74% increase in revenue in the six-month period from March to September.
Particularly in a nation where citizens are mobile-savvy and broad geographic regions can impede access to clinics and hospitals, digital health is a logical investment. Over the past 18 months, leading venture capital firm Long Hill Capital has invested over $150 million across 34 innovative healthcare and longevity startups. Last July, 13 major national departments and ministries jointly announced support for developing online medical services.
Digital health is a lucrative investment as well:
- Ping An Good Doctor connects patients with prescription services and online appointments. In just three weeks, the portal reached a billion visits.
- 111, the first Chinese telemedicine player to be publicly listed in the U.S., reported 113% revenue growth.
China is looking outside of its borders for this innovation as well, having exponentially increased its ODI investments in global healthcare, equity investments, and licensing during 2020. China Investment Research reports China’s spending in Q3 2020 alone to be over $2 billion, with an average investment size of $52 million. Acquisitions and investments included businesses in Canada, Germany, Israel, Japan, Netherlands, Qatar, Singapore, South Korea, Switzerland, the UK, and the U.S.—which could be good news for healthcare companies looking for capital and expansion.
In the words of pan-Asian investment advisory firm Dezan Shira & Associates: “China is putting its money where its mouth is in terms of partnering overseas in healthcare, and this can be expected to be a major driver of future BRI and global healthcare development.”
Ready to see how China factors into your strategies for production, innovation, and growth? Contact us today.