6 Reasons Why Businesses Are Turning to China
China has been one of the resounding economic success stories of the past decades. In transitioning from the years of tight government control over the corporate world under communism, to a system gradually beginning to resemble true capitalism, the country has enjoyed development rates unparalleled in any country across the globe.
However, China’s economy was not entirely spared from the effects of the recent economic crises. Growth rates, which topped 10 percent many times, have now been trimmed to between 7 and 8 percent. The development of infrastructure and industrialization has slowed. Some have gone so far as to say that the Chinese economy is beginning to show signs of instability, pointing to unknown levels of government debt and the lack of internal demand as factors undermining the current economic climate in the country.
Despite these worries, there are still plenty of reasons why businesses are drawn to China. When the latest Apple product hits Chinese stores, it makes big news, and auto sales in the country play a key part in the international strategies of many car companies. With over a billion people, between its capacity for production and its potential for demand, it’s no wonder that China is a vital commercial area for so many corporations. Let’s take a closer look at six of the most pressing reasons that companies are excited to do business in China.
1. Yuan Strength
China’s currency, the yuan, has continued to soar at several year-long highs against the dollar. The strength in China’s currency reflects on expectations of the stability of the region. If speculators were concerned about a run-in on the currency or about possible fractures in China’s economy, the value of the currency would be dropping instead of increasing.
When the yuan is high, it means that sales in China are worth more to companies, so targeting Chinese markets has never been a more profitable strategy. Of course, the reverse is also true; locating production facilities in China, where inputs and costs must be paid out in yuan, becomes less attractive. However, most economists agree that the yuan’s strength has generally helped China’s economy over the past several years, setting a tone for a lesser reliance on exports in the future.
2. Shanghai Special Economic Zone
Recently, the Chinese government opened up a new special economic zone in Shanghai. While the move does have its downsides — the zone is quite far from the city center, for example — many have lauded it as a gateway to addressing potential economic reforms for China’s economy. By acting as a testing ground for new policies, the zone signals that the Chinese government is at least considering further liberalization of some economic measures, possibly including key restrictions regarding the yuan or concerning the financial sector.
3. Third Plenum of China’s Communist Party
Later this month, the Chinese Communist Party will be holding its third Plenum, or conference, to discuss various topic pertaining to the country. Going into the meeting, there has been a lot of buzz about economic reforms that could be talked about — and possibly even announced — by Chinese officials. The few comments that have been made so far about what could be ahead have mentioned the terms “comprehensive” and “revolutionary” to describe the types of policy changes that may be in store for China’s economy.
4. Continuing Quantitative Easing
It isn’t hard to find money to invest in China. The United States has continued its quantitative easing program at the rate of $85 billion per month, while the Bank of Japan has also been injecting funds into its country’s economy (in the Japanese case, it’s supposedly to counteract the impact of a sales tax hike that is going into effect in 2014). With monetary policy loose, banks, and therefore companies, have easier access to capital.
This can lead to investments in countries such as China, which can offer returns greater than the paltry interest rates that are needed to obtain loans. It also means that companies without operations in China can produce additional products and services to sell in the country.
5. Transition to Consumerism
Chinese officials have repeatedly called for consumerism to be the catch phrase of the country’s economy moving into the coming years. While growth is still an official goal — Beijing has stated that the country’s economy should double in size this decade — the main priority has been shifted from expansion to stability. By stability, what is implied is demand that is internal, rather than external, and that requires a focus on the consumer. This could represent an opportunity for businesses that invest in the opportunity to sell goods in the country.
6. Concerns over Other Emerging Markets
China may once again become the go-to country for companies looking for an emerging market to help produce, develop, or sell their product. With countries such as India, Indonesia, and Brazil experiencing negative reactions to the possible end of quantitative easing, some investors have been scared out of those markets. This has further added to the problem of sinking currency values.
Although economists had pointed to many other countries, such as Bangladesh, as areas to which production operations could be relocated in search of lower costs, many such opportunities have now gained an additional level of risk as currencies have declined in value. This makes China a relatively more attractive option for companies looking for a developing market in which to do business.