CHINA is moving away from its traditional manufacturing-driven, export and investment-led economy to one underpinned by services, consumption and domestic activities. Such transition will potentially lower its economic growth from the past strong double-digit numbers. Despite moving away from its traditional business, fixed investment is still a key driver for the economic growth. It rose to a new high of 59.6 trillion yuan (US$8.7 trillion) in 2016 which accounts for about 80% of the total GDP due to the government’s strong push for infrastructure investment.

The fixed investment will continue to play an important role, going forward, owing to rising urbanisation and the new government initiatives like the Belt and Road, Beijing-Tianjin-Hebei city cluster, Yangtze River Economic Belt and International Industrial Capacity Cooperation initiatives roll out.

The inflow of foreign direct investment (FDI) has also been healthy. It rose from US$110bil in 2010 to US$136bil in 2015. Strong inflow will pave the way for the modern industries to nurture their technology as well as human capital as they move up the value chain. The outbound investment doubled from US$75bil in 2011 to US$150bil in 2015. As a net global investor, the productivity is expected to improve from the current 20% level, which in turn will support its growth. Also, structural reforms on the supply-side will support long-term growth and move out from the “middle-income” trap.

Streamlining regulation, lowering business costs and developing business strategies and services sectors apart from focusing on environment, reducing excess capacity in selected industries and property inventories are growth catalysts. Carrying out reforms of state-owned enterprises will remove monopolies and create new business opportunities.

The middle-class population is poised to be around 60% of the urban population by 2030 which translates to around 870 million of its population and reach 70% of its population by 2050, which accounts for an estimated 1 billion population. With the authorities planning to boost consumption to about US$6 trillion though the middle-income class, the potential uplift from the share of consumption to GDP will be around 50% by 2030 from 36% in 2014. The per capita disposable income in urban areas is estimated to reach around US$30,00 by 2030 from the current less than US$10,000.

China has become a major trading partner with Malaysia. The bilateral trade data which is made up of exports and imports has been in trade deficit at the Malaysia’s end since 2012. Room for the bilateral trade deficit to continue as we move forward is on the table. It is irrespective as to whether Malaysia engages strongly in the Belt & Road that will potentially create wider business and investment opportunities apart from a stronger presences of the state-owned enterprises in our domestic market.

Meanwhile, opportunities could emerge for Malaysian players by tapping into the China’s rising middle-income class. China’s urbanisation is still at the early stage. It has ample room to lift up the services sector in terms of quality, sophistication and business range. At the moment, about 40% of the population are in the low-income bracket with their annual personal disposable income below US$2,100 and should ease to 11% by 2030 owing to the migration of people to lower middle-income status between US$2,100 – US$10,800 a year. Meanwhile, the upper middle-income group (US$10,800-US$32,100) is envisaged to increase from 7.1% of the population in 2015 to 19.7% of the population in 2030, while the high-income individuals (above US$32,100) should jump from 2.6% of the population in 2015 to 14.5% in 2030.

On the back of an improving China’s middle-class segment of the population and a significant jump in the upper middle class, they will become the main driver of consumer spending in the future. Their consumer spending will be supported by the new globally minded Chinese generation who will influence the domestic market. Discretionary spending will outweigh basic necessity by the Generation 2 (G2) who are now in the early 20s and below. Born after mid-1908s and mostly from the one child policy and live in an environment of abundance, they are more modernised, heavy Internet users, seek emotional satisfaction through taste or status, brand loyal, and prefer niche over mass brands. They will become more sophisticated and seasoned shoppers who will seek for quality items and willing to pay a premium for discretionary items. The G2 made up nearly 200 million consumers in 2012 and accounted for 15% of urban consumption should double by 2020 to around 35%. By then, G2 consumers will be almost three times as numerous as the baby-boomer population that has been shaping US consumption for years.

Source: The Star