The Flanders-China Chamber of Commerce – with the support of Flanders Investment & Trade – organized a webinar, What does China's slowing growth mean for foreign investors?' on March 31, 2022. Guest speaker was Mrs Iris Pang, Chief Economist, Greater China at ING Wholesale Banking.
Ms Gwenn Sonck, Executive Director, Flanders-China Chamber of Commerce welcomed the participants to the webinar and introduced the speaker. According to the IMF, China will contribute more than a fifth to global GDP growth over the next five years. At the annual session of the National People's Congress (NPC) in March, Premier Li Keqiang announced a GDP growth target of around 5.5%. The Covid Omicron variant is rising in several cities in China with short lockdowns and mass testings. China is applying a dynamic zero-Covid policy and the rise of Covid and these lockdowns will also impact the Chinese economy. The fact that we cannot go to China is the number one problem for companies doing business with China and we do not expect getting back to China before the end of the year, but things could change earlier. Despite that, European companies remain committed to the Chinese market and they also indicate the plan to further grow their activities in China. The biggest risk for companies doing business with China is actually not to be in China. As many of us know, China's market offers long-term opportunities for our companies and many – if not most – companies are in China for China.
Mrs Iris Pang, Chief Economist, Greater China at ING Wholesale Banking, said companies with investments in China were asking themselves whether lo leave or stay in China. The aim of the webinar was to look at the policies and issues companies face. China's growth is definitely slowing because that is part of a developing country moving towards a developing country. China is now a middle income country and is moving away from a developing economy, which means that the GDP growth will be slower and slower every year. There will be ups and downs but the main trend will be slower growth. Our estimate is that by 2060 the growth rate will be around 2% a year, compared to the two sessions' target of 5.5% for this year. Keeping this in mind, China will be growing slower, but does this really matter to you? That depends whether you are in the retail sector doing business in China for China or in a manufacturing business producing for exports. The answer will be very different.
When you think about moving away from China, you usually talk about cost, mainly staff costs. The working population in China has started to shrink in 2020. And from the population pyramid we can see that after 20 years, the shrinkage of working population will be most obvious. But we don’t need to wait until then to see wages climbing, not because to fight inflation but because the supply of labor will be less and competition for labor will begin to be intense, especially for technical ones. This is the number one reason that has pushed factory owners to sort a second factory location outside China as they foresee wages to be high in their foreseeable future.For the past ten years, employees had low wages but in the past years they were high compared to other Southeast Asian economies. Why? Because the labor force is shrinking. From 2010 to 2020 there is a slight shrinking in the working population. The number of people below 30 years is a lot lower than between 30 and 55 so in the coming years the working population will be shrinking. China's one-child policy doesn't work and even the Chinese government knows this. For almost all Asian economies moving from a developing to a developed stage, the birthrate dropped to near zero. In Asia, people look at raising a child in a different way. They believe that it is a very important responsibility to provide the best education for the children including many extra-curricular courses such as piano classes. Very few children are playing in the playground. This means that raising a child requires a lot of money and not many people have this ability and even if they have the ability they don't want to spend their time raising children because they have been raised alone, getting all the attention. They are more selfish. Not many families have children nowadays or they have one, but at a late age. How many children can they have if they start having their first child at 30? This is something the government has to consider. It cannot really push people to have children. It can offer more incentives like the Singapore government, but it is questionable whether it will work in China. There needs to be monetary incentives not just for giving birth, it has to be a whole package.
Another cost is land cost, which will reflect in your rentals for factories. The cost for factory land has risen the most in the East where most foreign-invested companies are located. This is unavoidable when land is scarce. You can't expand the supply of land unless you reclaim land from the sea but China is very restrained in this respect. Electronics make up more than 50% of the manufacturing capacity and those companies can pay higher prices. You need to consider whether you will continue to pay higher wage and factory rental costs. It depends whether you are in a high value-added sector or producing low value products.
The old model is Europe and the U.S. investing in China; China exporting intermediate products to Southeast Asia with the final exports going to Europe and the U.S. or China exporting directly to Europe and the U.S. This old model no longer applies. Today, China, Europe and the U.S. are investing in Southeast-Asian countries and exports are going directly to the U.S., Europe and to China, because China is also a consumer market. The flows have changed. There is more and more FDI in Southeast Asia.
Where is the consumer demand in 2020? The U.S. makes up 34%, the EU ex-UK 27%, and Asia 39% of which China is 20%. Asian consumer demand is huge. Vietnam is the biggest manufacturing hub in Southeast-Asia. Vietnam's exports to the U.S. are rising fast. Vietnam is not big enough in terms of work force to totally replace China but it is an option if you don't want to pay high labor and land costs, depending on the industry you are in and the scale of your manufacturing. Moving the factory is a big cost unless your factory is old. Vietnam is small, but it has a trained workforce and an attractive land policy. Infrastructure is not so good, but you are also paying less.
Why do many factories choose to stay in China? China has the most digitalized factories in the world. Even middle-sized factories are employing a lot of robots, employ less workers and climb up the value chain. The Chinese government has special policies for preferred industries such as new energy automobiles, healthcare, clean commodities, and consumption based on Beidou, China's GPS. Links to the policies are on the slides.
What if you are aiming for China's market? During Covid, Chinese corporates have not been investing, but saving their deposits. Chinese households continued to save more, but less so in 2021, not spending on consumption, but putting their money in the stock market. The consumption growth rate was zero in 2020 and still near zero in 2021. During the Covid years people earn less as bonuses are cut so they are conservative in spending lavishly and waiting for the borders to open to spend abroad. People try to use the stock market to get back their bonus. Most will continue to do that until the borders reopen. They won't be very motivated to spend in China because the time for reopening the borders is coming closer although there is no fixed date. Why would you spend 10% or 20% more in China if you can buy abroad? For daily spending, Chinese consumers prefer quality not quantity.
The real GDP growth forecast for this year is 4.8%, a lot lower than the government forecast of 5.5%, which will be impossible to reach without very strong growth in infrastructure. Local governments will issue bonds for infrastructure. Inflation is never an issue in China, because there are price controls. Interests will be lower. We expect a small depreciation of the yuan versus the dollar, but less so for the euro.
A Q&A session concluded the webinar. Will there be more regulations for tech companies? Mrs Pang: It is more an issue of data compliance, relevant for all businesses, not just tech companies. Your legal department needs to see whether you are compliant.
How does the GPD growth square with FDI inflow? Mrs Pang: Slower growth usually means slower FDI or more picky FDI, as only the high-value businesses can bear the higher costs of doing business. Newcomers who have not yet invested in China have a lot of choice. Slow growth means higher expenses.
What are the main challenges for European companies in China today? Mrs Pang: The policy environment changes very fast and you need to keep up with it.
Could the internationalization of the RMB be a big game changer? Mrs Pang: There is a possibility in the future but not now. The yuan has safe haven status during the Ukraine conflict, but the yuan weakens due to domestic issues such as Covid. It still does not have a strong safe haven status. But the yuan will be more internationalized after the conflict, as Russia might be using the yuan more.
The CAI has been frozen, how do you see that developing? Mrs Pang: It will be under a thick layer of dust.
