Business Opportunities Between UK and China by Maggie Kang
If we want to know what will happen over the next 5 years in China, we need to look at the China’s 12th Five Year Plan authorised by China National People’s Congress and CPC in March 2011. This preliminary review is based on those documents and on government and research institutes that have put out papers in response to those documents.
I. China’s Ten Major Challenges
The goal of the Chinese regulators is for China to become a moderately prosperous country by 2020. The current five year period will be critical in meeting that goal. China has recently reached a level where its per capita GDP equals $US4,000. Its goal is to achieve a $US10,000 per capita GDP by the year 2020. This is a critical transition. It is generally believed to be relatively easy for a country to achieve the $4,000 number. It is common, however, for countries to stall out in GDP growth and never achieve the $10,000 goal.
The goal of the 12th Five Year plan is to prevent China’s growth from stalling. In the Opinion, the CPC identifies 10 factors that threaten the continued development of the Chinese economy:
- Resource constraints: energy and raw materials.
- Mismatch in investment and imbalance in consumption.
- Income disparity.
- Weakness in capacity for domestic innovation.
- Production structure is not rational: too much heavy industry, not enough service.
- Agriculture foundation is thin and weak.
- Urban/rural development is not coordinated.
- Employment system is imbalanced.
- Social contradictions are progressively more apparent.
- Obstacles to scientific development continue to exist and are difficult to remove.
II. The Theoretical Solution
Before discussing the concrete outline of the plan, the Party sets out the theoretical approach that will serve as the guide:
A. The Main Theme: Scientific Development
- During the period of the 12th Five Year Plan, economic development remains the key to resolution of all problems. (Wen Jiabao, quoting from the Opinion)
- Development must be â€œscientific,â€ practical (unconstrained by ideology), human centered, and sustainable.
B. The Main Line: ‘China must rapidly engage in a complete transformation of its form of economic development.’
It cannot be stressed sufficiently how radical is the proposed remedy. The idea is not to refine the current system, but to completely transform the current system in the brief period of five years. This is a bold goal.
The focus of transformation is as follows:
- From export led consumption to domestic led consumption.
- From excessive reliance on exports to balance between export, import and domestic consumption.
- From reliance on foreign technology to reliance on domestic innovation.
- From reliance on ‘old’ energy and materials and industries to creation of a low-carbon /new-materials based economy.
III. Ten Point Outline of the 12th Five Year Plan
A. In order to address the 10 challenges, and in accordance with the theoretical approach, the CPC proposes that the 12th Five Year Plan focus on 10 major areas, as follows:
1. Expand domestic consumption while maintaining stable economic development.
- Unleash domestic consumption This will be done through the measures at item seven below.
- Coordinate consumption, investment and export to create a balanced economy.
2. Modernize agriculture to create the new socialist rural village.
Modernize agriculture through mechanization and measures that allow larger farms.
Invest in agriculture infrastructure, especially in waterworks.
- Create non-agricultural rural employment.
- Improve legal and financial development mechanisms.
- Improve agricultural service business in areas such as wholesaling, warehousing, processing, transportation and marketing.
3. Develop a modern, balanced industrial and trade structure.
- Develop service trade. Services currently contribute to less than 40% of GDP. The goal is to raise this number to 70% or higher.
- Develop modern energy and integrated logistics.
- Develop marine resources.
4. Advance the integration between regions and encourage stable urbanization.
- Combat regional disparities.
- Eliminate the urban/rural distinction. Cities at the second tier and lower must accept rural migrants. The goal is to provide for industrial/service employment for agricultural laborers in areas close to their current residence. This will be done to avoid a mass migration of rural residents into the tier one cities.
5. Promote energy saving and environmental protection.
Currently, for every 1% increase in GDP, China’s energy use increases by 1% or more. If this rate continues, China will need to increase its energy consumption by 2.5 times to achieve its 2020 economic goal. To put this into perspective, this would mean increasing the current consumption of coal from the current 3.6 billion tons per year to an astronomical 7.9 billion tons a year.
No one in China thinks this can be done. One major way to reduce the amount of energy required for the Chinese economy is to implement energy saving practices throughout the economy. A second way to reduce is to shift from hydrocarbon based energy to alternative energy sources. The new plan advocates an all out program in this area.
6. Create an innovation driven society by encouraging education and training of the workforce.
The plan seeks to shift China from its role as the factory of the world to a new role as a technological innovator for the world. There are two components to this approach:
- China will need to become a domestic innovator in all areas of current modern technology, with an emphasis on practical industrial applications.
- Where China is not capable of domestic innovation, China will continue to import technology from advanced economies. However, China will seek to actively domesticate that technology through a program of ‘assimilate and re-invent.’ The recent program for production in engines for high speed rail is offered as an example of the ‘assimilate and re-invent’ approach.
7. Establish a comprehensive public social welfare system
In order to meet the goal of unleashing domestic consumption, China has to move to a policy that puts more disposable income in the hands of its citizens. The plan proposed the following approach:
a. Labor and employment – China must provide jobs for a growing workforce. There are two key areas:
- It is estimated that over the next ten years, 200 million persons will be shifted from agricultural labor to urban industrial/service labor. Jobs for these persons consistent with their training must be provided.
- Currently, China’s colleges produce far more graduates than the economy can absorb. Entry level jobs for college and technical school graduates must be provided. Education must also be adjusted to accord with the realities of the job market.
b. Wages – Chinese wage are abnormally low. Most planners are pushing for tripling of the average wage for factory workers during this 5 year plan.
c. Provide comprehensive government benefit programs, especially retirement pensions.
d. Provide government funded medical services with comprehensive basic coverage by the end of 2011.
e. Maintain active population control.
It is interesting to note that two major issues are not effectively considered in the plan: the first is the cost of housing and the second is the cost of high school and college education. Though there has been some discussion of constructing low income housing, the measures proposed will do little or nothing to address the problem of affordable housing in China’s major cities.
8. Encourage cultural production in order to increase China’s ‘soft power’
China will seek to make its case for the world to avoid misunderstanding China’s goals and its role within the world economy.
9. Increase the pace of reform of the economy.
- Financial market reform, especially the RMB.
- Energy price reform and price reform of other economic inputs (raw materials).
10. Continue with liberalization and ‘opening-up’ to the outside, but on a new track.
- Shift from export only to a balance between export and import.
- Shift from inbound investment only to a balance between inbound and outbound investment. China will continue with its ‘going out’ policy.
- Actively participate in international economic governance.
Keys to Success in China
Market Knowledge – Essential to Establishing Achievable Plans and Goals!
To ensure a successful venture into China, small and mid-size UK firms should thoroughly understand the external and internal market factors in China, have well defined strategic and implementation China plan, and solicit support of local business partners to avoid start-up risks.
Personal Relationships (‘Guanxi’) – Critical to Success!
Developing strong personal relationships with Chinese customers and partners is part of Chinese business culture on how to get results in China. These relationships can months or years to develop, and can be accelerated by the selection of the right China partner.
Chinese Perspective – Navigating through Rapidly Changing Environment!
Visiting China for face-to-face meetings with local business partners and potential customers is important to gain both market knowledge and perspective on doing business China. It can also start the process of developing key personal ‘Guanxi’ relationships.
What to Avoid – Maximizing the Opportunity of Success in China!
Small and mid-size companies may decide to neglect increasing their presence in China, or decide to penetrate China using a strategy that was successful in the USA. China has tremendous potential that shouldn’t be missed, but it’s important not to underestimate the risks of establishing Chinese marketing and manufacturing operations.