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China: Realising or Inhibiting Potential

by Helen Sanders, Editor

Ensuring the safety, integrity and genuineness of products will continue to pose a major challenge for the Chinese government.

This month I visited China for the first time in eight or nine months. My visit was just after Golden Week, when the country shuts down for nearly a week’s holiday. And what do people do during this week? They shop. Even a few months on from my last visit, the changes in the major cities are very noticeable. The number of sleek new malls, sporting only the top designer brands, is growing rapidly, and the appetite for French brands in particular seems unquenchable. The roads are ever more crowded with shiny vehicles, each passing a new skyscraper every couple of weeks in Shanghai alone.

The genuine article?

Despite the significant growth and opportunity, there remain significant challenges in China. Lack of confidence in the genuineness and integrity of goods continues to encourage those consumers who are able to go to Hong Kong for their purchases. Indeed, over a million extra Chinese visitors filled the Hong Kong malls over the weekend of Golden Week. After numerous scandals and contaminations, from baby milk and pharmaceuticals, to toilet paper and noodles, this lack of confidence is also becoming increasingly apparent amongst the business community. After all, a company may have no involvement at all in fake production of its goods, but the damage to its brand could be considerable should a scandal emerge. Consequently, ensuring the safety, integrity and genuineness of products will continue to pose a major challenge for the Chinese government, to increase confidence and encourage investment within the country.

Addressing inequalities

There are other challenges too. The story of the coastal cities is not yet the same as that of the inland provinces, and indeed parts of the major eastern cities, where prosperity, urbanisation and electrification have yet to have a major effect. To address this, the need for government action, investment, and natural resources to create the necessary infrastructure and service the growing demands of a newly prosperous population, is formidable. As Lisa Robins, Head of Treasury & Securities Services, China, J.P. Morgan summarises, 

"Within China, we see a tremendous focus on expanding the domestic consumer base and reducing the gap between the coastal cities and the inland areas in the west of the country, both in terms of infrastructure and the economy. Looking outside of the country, there is a significant focus on Chinese foreign direct investment (FDI) particularly to satisfy China’s needs for natural resources.”

Bearing in mind the sheer scale and diversity in China, foreign companies seeking to establish, consolidate or expand their presence in the country need to establish different strategic approaches to the emerging and emerged economies within China. This potentially impacts not only sales and distribution, but also production, as inland regions become more attractive for sourcing than the more expensive coastal regions. Furthermore, North American and European corporations will need to address competition not only from growing Chinese companies within the country, but also beyond as companies in all industries, including banking, look to expand their activities overseas. As Sam Xu, Senior Product Manager, J.P. Morgan Treasury Services explains,

“In addition to FDI by corporations, the largest Chinese banks are also establishing an overseas presence in both developed and emerging countries to satisfy the growing international needs of their Chinese corporate client base. As both corporations and banks seek to expand overseas, M&A offers a convenient and quick way of achieving this.”

Consequently, whilst on one hand the population in China is becoming increasingly accustomed to western brands, consumers in established markets are also likely to become more exposed to Chinese brands, and familiar brands will become Chinese-owned.

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