Posts tagged ‘Economic growth’

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16/06/2016

India Makes It Easier for Local Airlines to Fly Overseas – India Real Time – WSJ

India’s federal government on Wednesday relaxed the criteria for domestic airlines to fly overseas as part of a new civil-aviation policy aimed at driving growth in the sector.

Local carriers will no longer be restricted by the number of years they have operated domestically to fly abroad, Civil Aviation Minister Ashok Gajapathi Raju said.

Until now, they were required to complete five years of domestic service and have at least 20 planes in operation before being permitted to fly overseas. The government scrapped the time requirement but carriers must still reach the same criterion for planes or deploy 20% of their fleet on domestic routes.

Newer carriers such AirAsia India Pvt.—the local joint venture of Malaysia-based AirAsia Bhd.—and Vistara—the Indian airline venture of Singapore Airlines Ltd., have been pushing for a relaxation of the rules.

The new National Civil Aviation Policy was welcomed by Amar Abrol, CEO of AirAsia India, which started operating in India in June 2014. “The NCAP gives us clear direction to ramp up our operations in India and grow our business in the domestic segment before we scale our operations to fly international,” he said in a statement.

Both AirAsia and Vistara will need to increase their fleets significantly to qualify for starting international flights. AirAsia now has six planes and Vistara has 11.

Source: India Makes It Easier for Local Airlines to Fly Overseas – India Real Time – WSJ

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10/06/2016

China now rivals US and Europe as growth engine for Asian exports | South China Morning Post

China is now an equal or even bigger driver of export growth in neighbouring economies than the US and EU combined, marking a significant shift in the economic pecking order since the 2008 global financial crisis.

That’s according to research by Deutsche Bank AG economists who weighed up the influence of the US and China over the rest of Asia through the prism of export growth, as well as the currency and bond markets.China committed to free trade, market reforms, says senior official

In Taiwan and Indonesia, for example, the growth of China’s gross domestic product (GDP) dominates the US and European Union’s as a source of export demand. In other economies, the trading giants are equally important.

“This is noticeably different from the pre-crisis years when China was much less important –- bordering on irrelevance – as an engine of growth in the region,” Deutsche analysts led by Asia-Pacific chief economist Michael Spencer wrote in a note.

After a rocky start to the year, China has been aided in its growth prospects by a record surge in credit in the first quarter. Key indicators for May are expected to show that the economy is continuing to find its footing and growth is on track to hit the Communist Party’s goal of 6.5 per cent to 7 per cent for 2016.

The International Monetary Fund in April upgraded its China growth forecasts by 0.2 percentage point for this year and next, following signs of “resilient domestic demand” and growth in services that offset weakness in manufacturing.

China needs market-driven interest rate system to help yuan become global currency: economists

Beyond the pace of GDP growth, China’s currency gyrations are also increasingly important across the region. While the dollar still drives volatility in most Asian currencies, the yuan is as least as important for fluctuations in the Malaysian ringgit and South Korean won and is growing in significance for other exchange rates, except the Philippines peso.

“Asia is far from being a ‘yuan bloc’, but idiosyncratic shocks to the yuan cannot be ignored,” according to the Deutsche analysts.

The People’s Bank of China (PBOC) surprised traders this week by setting the reference rate at weaker-than-expected levels, helping send the currency to its biggest declines in four months versus a trade-weighted basket that includes the yen and the euro. The rate’s fixing had become more predictable since early February after the PBOC pledged greater transparency and the yuan increasingly tracked moves in the dollar against major currencies. That was after a sudden weakening of the yuan in January fuelled fears of a devaluation and triggered global market turmoil. During the subsequent three months, the central bank adopted a more market-based system to set the rate and said the basket would play a bigger role.

China cooling imports are sending a huge chill across the global economy

But the US still dominates in the bond markets, and moves in Treasury yields continue to steer Asian bond trading. And even if Asia central banks don’t match rate tightening by the US Federal Reserve, financial conditions in the region may tighten if US yields increase.

“We find only weak evidence that fluctuations in Chinese yields have any impact on other countries’ bond markets,” the analysts said.

Source: China now rivals US and Europe as growth engine for Asian exports | South China Morning Post

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10/06/2016

For India’s surging economy, small is beautiful | Reuters

For Rohan Sharma, business has never been better. Sales at his autoparts company in Gujarat are booming and the order book has almost doubled in the past year.

His Bhagirath Coach & Metal Fabricators has just invested nearly $120,000 in new machinery and plans to spend up to $1.2 million this year to expand capacity.

That’s an encouraging sign for Asia’s third-largest economy, where stressed balance sheets at big firms and heavy reliance on bank credit, which has dried up following a surge in troubled loans, have stymied efforts to revive private investment.

Sharma does not face such constraints. He says his firm is debt-free and relies mainly on internal resources to fund capacity expansion.

A survey from the Reserve Bank of India shows he is not alone. The annual study of nearly 240,000 unlisted small- and medium-sized enterprises (SMEs) found they are saving their way to growth, helping transform India into the world’s fastest-growing large economy in the past two years.

India has more than 45 million SMEs, accounting for nearly 40 percent of gross domestic product. Most are unlisted, and their earnings growth has outpaced listed companies for the past three years.

“We never allowed exuberance to get the better of hard business logic,” Sharma said.

Sales at smaller private firms grew 12 percent in 2014/15, the central bank survey showed. Sales at listed big companies rose 1.4 percent over the same period.

Operating profit of the unlisted firms grew an annual 16.6 percent in the year, three times the pace at listed companies, and they increased their gross savings.

While higher expenses halved net profit growth at private firms, they still grew at double-digit pace. In contrast, listed companies struggled with shrinking profits.

Debt-laden big listed firms, meanwhile, are still reluctant to undertake new investments, and foreign firms can find India’s labyrinthine regulations overwhelming.

Also, infrastructure and resources needed for complex manufacturing, like roads, skilled labour and consistent power supply, is often lacking.

That led to a contraction in capital spending in the January-March quarter. Despite that, strong consumer spending helped power economic growth of 7.9 percent, the fastest rate among the world’s major economies.

Source: For India’s surging economy, small is beautiful | Reuters

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18/03/2016

Here comes the modern Chinese consumer – McKinsey & Co

Despite concerns about economic growth, the country’s consumers keep spending. Yet our latest survey reveals changes in what they’re buying and how they’re buying it.

Cooling economic growth, a depreciating currency, and a gyrating stock market are making political and business leaders concerned that China’s economic dream may be ending. Yet Chinese consumers remain upbeat. In fact, consumer confidence has been surprisingly resilient over the past few years as salaries have continued to rise and unemployment has stayed low.

 

However, our latest survey of Chinese consumers reveals significant change lurks beneath the surface. Reflecting 10,000 in-person interviews with people aged 18 to 56 across 44 cities, our 2016 China consumer report found that the days of broad-based market growth are coming to an end. Consumers are becoming more selective about where they spend their money, shifting from products to services and from mass to premium segments. They are seeking a more balanced life where health, family, and experiences take priority. The popularity of international travel is astounding among Chinese consumers, as is their adoption of trends such as mobile payments. And despite many similarities, consumer behavior can vary significantly among the country’s 22 city clusters.

In short, our latest research suggests we are witnessing the modernization of the Chinese consumer, and that will only make the market more challenging for consumer-goods companies. But for those able to get it right, the rewards may be substantial. In this article, we’ll examine the evolving behavior of Chinese consumers through three lenses: how willing they are to spend, what they are buying, and where they are buying.

How willing they are to spend

When asked about their expectations regarding future income, 55 percent of consumers we interviewed were confident their income would increase significantly over the next five years—just two percentage points lower than in 2012. (By comparison, just 32 percent of consumers in the United States and 30 percent in the United Kingdom agreed with the same statement in 2011.)

That’s not to say that Chinese consumers are unaware of the deteriorating condition of the economy. A growing number are seeking to save and invest, and we found differences in consumer confidence widening at a regional level. While confidence about income growth during the next five years rose to 70 percent in the Xiamen–Fuzhou city cluster, for example, it decreased to as little as 35 percent in Liao Central.

What they are buying

We found that consumers are generally becoming more selective about their spending. They are allocating more of their income to lifestyle services and experiences—over half plan to spend more on leisure and entertainment (the 50 percent surge in box-office receipts in the past year is just one indicator of that trend). At the same time, spending on food and beverages for home consumption is stagnating or even declining.

Chinese consumers are also increasingly trading up from mass products to premium products: we found that 50 percent now seek the best and most expensive offering, a significant increase over previous years. It’s no surprise that the growth of premium segments is outpacing that of the mass and value segments, and foreign brands still hold a leadership position in that premium market. What’s more, a rising proportion of Chinese consumers focus on a few brands, and some are becoming loyal to single brands. The number of consumers willing to switch to a brand outside their “short list” dropped sharply. In apparel, for instance, the number of consumers willing to consider a brand they hadn’t before dropped from about 40 percent in 2012 to just below 30 percent in 2015.

Becoming part of the closed set of the few brands that consumers consider, or even the one brand that consumers prefer, is increasingly challenging. Fewer consumers are open to new brands, and promotions are becoming less effective at encouraging consumers to consider them.

With a few notable exceptions, such as Huawei’s growing share of the premium-smartphone market, Chinese brands have not gained much traction in many premium segments, such as skincare, cars, sports, and fashion. That contrasts starkly with the mass segment of the market, where local brands are winning market share from foreign incumbents by offering a much stronger product proposition.

Where they are buying

Although China is the world’s largest e-commerce market—generating revenue of about 4 trillion renminbi ($615 billion) last year, around the same as Europe and the United States combined—and consumers increasingly purchase online, physical stores remain important. Consumers engage with brands both online and offline, and satisfaction with physical stores remains higher than with online ones. But the gap is narrowing, especially as satisfaction with hypermarkets declines.

One trend that is helping maintain interest in physical stores is “retailtainment.” Two-thirds of Chinese consumers say that shopping is the best way to spend time with family, an increase of 21 percent compared with three years ago. Malls—which combine shopping, dining, and entertainment experiences the entire family can enjoy—have benefited most from this trend, at the expense of big-box retail outlets such as department stores and hypermarkets.

Consumers also reinforce family ties through travel: 74 percent of consumers say it helps them to better connect with family, and 45 percent of international trips were taken with family in 2015, compared with 39 percent in 2012. More than 70 million Chinese consumers traveled overseas in 2015, making 1.5 trips on average, and shopping is integral to this experience. Some 80 percent of consumers have made overseas purchases, and nearly 30 percent actually base their choice of a travel destination on shopping opportunities. Among international travelers, around half of their watch and handbag purchases are made overseas, while apparel and cosmetics are the most frequently purchased categories.

Overall, Chinese consumers are adopting new products, services, and retail experiences at rates unseen in developed markets. To take one example, mobile-payment penetration in China went from zero in 2011 to 25 percent of the population in 2015. At the same time, there are still differences in how Chinese consumers in various regions spend. While new highways, high-speed-rail links, and mobile Internet access have strengthened connectivity between neighboring clusters over the past few years, we found that differences across the country’s 22 geographic clusters1have grown even more pronounced. For instance, 35 percent of consumers in the Shanghai city cluster have purchased apparel online in the past six months, compared with just 4 percent of consumers in the Chengdu city cluster.

The Chinese consumer is evolving. Gone are the days of indiscriminate spending on products. The focus is shifting to prioritizing premium products and living a more balanced, healthy, and family-centric life. Understanding and responding to these changes in spending habits will be decisive in determining the companies that win or lose, whether international or domestic competitors. And while scale, speed, and simplicity proved advantageous in the past 15 to 20 years, the changing shape of Chinese consumption seems sure to topple some giants of the past and elevate new champions. Which will your company be?

Source: http://www.mckinsey.com/Industries/Retail/Our-Insights/Here-comes-the-modern-Chinese-consumer?cid=other-eml-alt-mip-mck-oth-1603

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28/01/2016

Grossly Deceptive Plans (GDP) | The Economist

ON JANUARY 19th China declared that its gross domestic product had grown by 6.9% in 2015, accounting for inflation—the slowest rate in a quarter of a century.

It was neatly within the government’s target of “around 7%”, but many economists wondered whether the figure was accurate. Online chatter in China about dodgy GDP numbers was fuelled a week later by the arrest of the man who had announced the data: Wang Baoan, the head of the National Bureau of Statistics. The country’s anti-graft agency accused him of “serious disciplinary violations”, a euphemism for corruption. But beyond all the (justifiable) doubts about the figures lies another important question. That is: why does China have a GDP target at all?

It is the only large industrial country that sets one. Normally central banks declare specific goals for things like inflation or unemployment. The idea that a government should aim for a particular rate of output expansion, and steer the economy to achieve that, is unusual. In the case of China, which is trying to wean its economy off excessive reliance on GDP-boosting (but often wasteful and debt-fuelling) investment, it is risky. It is inconsistent with the government’s own oft-repeated mantra that it is the quality of growth that matters, not the quantity.

In the past, setting a target may not have made much difference. For all but three of the years between 1992 and 2015, China’s growth was above target, often by a big margin. A rare period when targets seemed to affect the way officials tried to manage the economy was from 2008 to 2009, when growth fell sharply (see chart). It would be hard to argue that targets themselves have been responsible for China’s overall (impressive) record of growth in recent decades.

Now, however, the economy is slowing. This is inevitable: double-digit growth is no longer achievable except at dangerous cost (total debt was nearly 250% of GDP in the third quarter of 2015). But the government is worried that the economy may slow too fast, and that this could cause a destabilising surge in unemployment. So it has been ramping up investment again, and goading local governments to do the same by setting a high growth target.

For a while there were signs that the leadership itself had doubts about the merits of GDP target-setting. In 2013 Xinhua, an official news agency, decried what it called the country’s “GDP obsession”. By the next year, 70 or so counties and cities had scrapped their targets. In 2015 Shanghai joined them, becoming the first big city to break with orthodoxy (each level of government sets its own GDP target, often higher than the national one). Liu Qiao of the Guanghua School of Management at Peking University says the central government ought to follow suit.

Last year there were hints that it might. The prime minister, Li Keqiang, said the government would not “defend [the target for 2015] to the death”. And in October, talking about the government’s work on a new five-year economic plan (which will run from 2016 to 2020), President Xi Jinping avoided mentioning a number. That raised expectations that targets might at least be downplayed, if not abandoned.

They have not been, however. An outline of the five-year plan, unveiled in November, contained the usual emphasis on growth. And Mr Xi appeared to change his tune, saying expansion must average at least 6.5% a year until 2020. Many economists believe that will require yet more debt-inducing stimulus. A GDP target for this year is all but certain to be announced, as usual, at the annual session of the legislature in March (when the five-year plan will also be adopted). It will probably be higher than 6%. Speculation that the government might set a target range in order to give itself more policymaking flexibility (as the IMF and the World Bank have urged) has ebbed. In December some national legislators complained that local governments were busting their debt ceilings because there was “still too much emphasis on GDP”.

So why is there still a target? The reasons are political. In a country so large, central leaders are always fearful of losing their grip on far-flung bureaucrats: setting GDP targets is one means by which they believe they can evaluate and control those lower down. Local officials are also judged by environmental standards, social policies and what the Communist Party calls “virtue”—that is, being uncorrupt and in tune with the party’s latest interpretation of Marxist doctrine. But GDP is usually the most important criterion, having the attraction of being (roughly) measurable.

Source: Grossly Deceptive Plans | The Economist

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14/01/2016

Economists React: China’s December Trade Data May Mean Worst Is Over – China Real Time Report – WSJ

Better-than-expected export and import data in December suggest the beginning of a modest improvement in trade despite recent turmoil in Chinese financial markets, economists say, even as a weaker yuan helps exporters.

China’s exports in December were off 1.4% from a year earlier, a smaller decline than November’s 6.8% or the median 8% forecast of 15 economists surveyed by the Wall Street Journal. Imports were down 7.6%, compared with November’s 8.7% and the 11% median forecast.

Following are excerpts from economists’ views on Wednesday’s trade data, edited for style and length:

The idea that China needs to devalue its currency to reflect a weakening export sector is not borne out by the 2015 trade figures, which show that China gained world-wide market share in a tough global trading environment. The past couple of months, we’ve seen exports surprise on the upside. Worries that something is going on in China behind the scenes, that real compelling economic fundamentals are pushing the yuan weaker, is inconsistent with what we’re seeing on the trade front.—Tim Condon, ING Group ING +0.96%

China’s December trade data was reassuring—indicating that, despite the turmoil on the stock and foreign-exchange markets, growth dynamics in the real economy are evolving more gradually and may actually be improving somewhat. The improvement in exports suggests that the global goods trade gained some momentum toward the end of 2015, with China helped by a weaker yuan. Headline December goods import data were down 7.6%, but import volumes have started to improve. We estimate import volumes were up 7.5% year on year in December, mainly due to better “normal imports” used in China’s own economy (rather than re-exported), implying a pickup in domestic demand momentum at the end of 2015.—Louis Kuijs, Oxford Economics

Better-than-expected trade data hint that the yuan depreciation in December—the currency fell 1.5% against the dollar—could have boosted external demand. For the year, China’s exports dropped by 2.8% and imports plunged by 14.1%. The underperformance of imports reflects sluggish demand for commodities as China moves toward a more consumption-driven growth model. It also highlights the deleveraging under way in China’s manufacturing sector because of the property slowdown. The mixed picture illustrated by China’s trade figures convinced us that growth will be under pressure. Also, China could steer further yuan depreciation at an appropriate pace and time to support economic growth and facilitate the deleveraging in many sectors plagued by overcapacity.—Zhou Hao, Commerzbank AG

China’s better-than-forecast trade figures may signal the beginning of a modest improvement as the yuan stabilizes against a weighted basket of currencies. That could translate into export growth of 5% to 7% and import growth of 1% to 2% this year. Demand may not be a big driver, but China is becoming more competitive with its exchange rate.—Ding Shuang, Standard Chartered STAN.LN +0.35%

China’s better-than-expected export data in December was mainly due to the world’s recovering appetite for exports from China, but its sustainability is still an open question. The devaluation of the yuan might have played a role in boosting exports, though it wasn’t the main driver. To what extent the yuan will influence exports this year is uncertain, given the central bank’s intervention in the foreign-exchange market. But January export figure should be relatively positive since 2015 provided a weak base for comparison.—Ma Xiaoping, HSBC HSBA.LN +0.49%

Source: Economists React: China’s December Trade Data May Mean Worst Is Over – China Real Time Report – WSJ

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06/01/2016

What might happen in China in 2016? – McKinsey

Abbreviated from McKinsey: http://www.mckinsey.com/Insights/Strategy/What_might_happen_in_China_in_2016?cid=other-eml-alt-mip-mck-oth-1601

What’s in store for China in 2016?

The reality is that China’s economy is today made up of multiple subeconomies, each more than a trillion dollars in size. Some are booming, some declining. Some are globally competitive, others fit for the scrap heap. How you feel about China depends more than ever on the parts of the economy where you compete. In 2015, selling kit to movie theaters has been great business, selling kit to steel mills less so. In your China, are you dealing with a tiger or a tortoise? Your performance in 2016 will depend on knowing the answer to this question and shaping your plans accordingly.

Many well-established secular trends in China will continue in 2016. The service economy’s expansion is perhaps most prominent among them. In this piece, as usual, I won’t spend much time on the most familiar things. Instead, I will highlight what I believe will become the more important and more visible trends in 2016, either because they are now accelerating to scale or a discontinuity may become a tipping point. (For a quick summary, see sidebar, “The China Orr-acle: Gordon’s predictions for 2016.”) I hope you find my ideas valuable.

The 13th five-year plan—few surprises

Much of China’s 13th five-year plan will seem pretty familiar, as it has been flagged in advance at the Fifth Plenum and elsewhere. Perhaps the only challenge will be to interpret the plan’s intent clearly through the new “party speak” now coming to dominate government pronouncements.

The GDP growth target will still be 6 percent–plus, which will be softened a bit but not eliminated by parallel quality-of-life goals: the environment, health, income, and the like. Achieving the growth target will remain the core objective of fiscal and monetary policies, so expect lower interest rates and pressure on the exchange rate versus the US dollar in 2016. Financial reforms aimed at moving more of the economy toward a market-based allocation of capital will continue.

Meanwhile, there will be more progress on interest-rate deregulation, on the IPO process (registration rather than approval), on permitting new entrants (especially from the tech sector and from abroad) into financial services, and on reimplementing laws suspended in the summer of 2015. The plan will promote decentralization, but the reality is likely to be greater centralization. More infrastructure will be built, mainly to enhance intraregional development—for example, around Greater Beijing.

Green initiatives, reinforced by December 2015 commitments made in Paris and the “red alert” in Beijing that same month, will take center stage. The central government will make such big and visible commitments to its citizens that local authorities will have to mount a serious effort to deliver. There will be tougher emissions standards and more spending to support the development of nonfossil fuels. Green finance will be available. Both private-sector and state-owned companies will rebrand their ongoing initiatives as green. China will explicitly build new export engines from its emerging global leadership in green products; for example, expect to see lots of Chinese-made air-filtration products in Delhi and the rest of India in 2016. Beyond green initiatives, going global will remain a key theme, as detailed in the One Belt, One Road program.1

 

Finally, the plan will recognize China’s success in raising labor productivity over the past decade and prioritize the acceleration of productivity growth, for both capital and labor, from 2016 to 2020. The plan will raise the implications of higher productivity for workers: the disappearance of many traditional well-paying jobs and the need for increased labor mobility and for the lifetime renewal and development of skills. But I am concerned that implementation will be left to local administrators and that the regions requiring the most help will have the lowest amounts of money to invest in reskilling the workforce and the least impressive actual skills to deliver.

Fewer jobs, flatter incomes—and, potentially, less confidence

The workplace in China is already changing dramatically in ways that will create many individual losers—for example, workers in industry sectors in secular decline (such as steel or textiles) or in industries where technology is rapidly displacing people even as output grows (like financial services or retailing). The government must help these workers reskill themselves to deliver on its commitment that all parts of society will benefit from economic growth and to keep people actively engaged in the economy. It will not be enough for officials to visit major local employers, as they did during the global financial crisis, and press them to retain all their current workers.

…

The maturing of investing: More options for Chinese investors and foreign investment managers

Chinese investors today remain dependent on bank deposits and property. Yet after the volatility of the property and stock markets in 2015, investors want to diversify into more stable vehicles. The number of wealth managers seeking to address this need has increased massively. Often, their main challenge is not finding clients but rather credible products to sell. The main challenge for investors is to find advisers they can trust; most simply push the products that give them the largest commission.

…

Manufacturing in China is changing, not disappearing

The closely watched manufacturing purchasing manager’s index (PMI) remains below 50, which indicates deterioration, leading to talk that the country may be nearing the end of its time as a manufacturer for the world. Let’s be clear: manufacturing is not about to become irrelevant in China. However, the country is evolving toward extremes of performance: the truly awful and the genuinely competitive.

…

 

Agricultural imports are rising and rising

In 2016, China’s growing food needs will drive agricultural imports to record highs in both volume and value. A wider range of countries than ever before will find agricultural-export opportunities there.

…

More centralization

The Chinese media, especially during President Xi’s increasingly frequent trips abroad, made it clear that economic decision making has been centralized over the past two years. China will become still more centralized in 2016, rolling back decentralization where it had unintended outcomes. For example, after local governments received authority to approve new power plants, more than 150 new coal-fired ones were green-lit in the first nine months of 2015—more than three times the number approved in 2013, under the old centralized decision-making process. Unsurprisingly, coal-producing areas granted the largest number of approvals for plants that weren’t required under any realistic demand projection, even setting aside the question of whether any new plants at all should be coal fired. State-owned enterprises are behind most of these projects and would expect to be bailed out if they fail. Thus, for multiple reasons, such decisions will be recentralized.

…

Moving people at scale—the middle class, not peasants

Despite prodigious investment, many Chinese cities cannot build enough quality infrastructure to avoid massive day-to-day congestion. Even though the new five-year plan will commit the country to build more of it, that will not solve these problems; growth has simply outstripped potential solutions. For example, Beijing’s population officially grew by 60 percent, to 21 million, in just the past 14 years—and unofficially by significantly more.

…

Movies in China: $$$

A Chinese movie will gross $500 million domestically in 2016. As a benchmark, the highest-grossing movie of all time on US domestic screens is Avatar, at $760 million. This year’s leading domestic productions in China were Monster Hunt (which has grossed $380 million as of September) and Lost in Hong Kong (more than $200 million). The leading international movie, Furious 7, grossed almost $400 million in China. The country’s box office has been set to grow by almost 50 percent in 2015, and new screen additions alone should deliver 20 percent–plus growth in 2016. More than half of the top-ten movies for 2015 (as of late November) are domestic productions, and 60 percent of the box office comes from Chinese movies. The country’s producers and directors have clearly tapped into what excites local moviegoers (and what censors permit).

…

China continues to go global, with the United Kingdom as a new focal point

China’s outbound investment will accelerate in 2016, with One Belt, One Road–related initiatives driving much of it. A second driver will be distressed-asset acquisitions in basic materials and related sectors: Chinese acquirers may plan not to extract the assets in the near term but simply to stockpile them as long-term insurance. Finally, a growing share of the acquisitions will come from private-sector companies that aspire to global leadership. These companies are increasingly sophisticated buyers, conducting quality due diligence, working with traditional advisers, and focusing on countries where they think that warm political relations will make it easier to do deals.

…

And finally . . .

My enduring prediction that big business would embrace soccer in China has finally been realized, even if that happened more slowly than I expected. Footballer Sergio Agüero, of Manchester City Football Club, took what became one of the world’s most shared selfies, with President Xi and British Prime Minister David Cameron. It seemed only a matter of time before Chinese capital (specifically, China Media Capital and CITIC Capital Holdings) invested in Manchester City and its global network of teams, which includes the New York City Football Club. Other leading teams are exploring how to participate in China. Arsenal Football Club has a multiyear grassroots program in place, as does Real Madrid. And outbound investment in soccer is growing, highlighted when Wanda Group bought into Atlético de Madrid in 2015.

…

As always, don’t overfocus on short-term noise about Chinese GDP growth. Try to identify the medium-term direction of the parts of the economy relevant to your business. Enjoy China in 2016!

Gordon Orr is a director emeritus of McKinsey and senior external adviser.

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12/11/2015

Five myths about the Chinese economy – McKinsey Quarterly

A widely held Western view of China is that its stunning economic success contains the seeds of imminent collapse. This is a kind of anchoring bias,1 which colors academic and think-tank views of the country, as well as stories in the media. In this analysis, China appears to have an economy unlike others—the normal rules of development haven’t been followed, and behavior is irrational at best, criminal at worst.

There’s no question, of course, that China’s slowdown is both real and important for the global economy. But news events like this year’s stock-market plunge and the yuan’s devaluation versus the dollar reinforce the refrain, among a chorus of China watchers, that the country’s long flirtation with disaster has finally ended, as predicted, in tears. Meanwhile, Chinese officials, worried about political blowback, are said to ignore advice from outside experts on heading off further turmoil and to be paranoid about criticism.

My experience working and living in China for the past three decades suggests that this one-dimensional view is far from reality. Doubts about China’s future regularly ebb and flow. In what follows, I challenge five common assumptions.

  1. China has been faking it

A key tenet of the China-meltdown thesis is that the country has simply not established the basis for a sustainable economy. It is said to lack a competitive, dynamic private-enterprise structure and to have captured most of the value possible from cheap labor and heavy foreign investment already.

Clearly, China lacks some elements of a modern market economy—for example, the legal system falls short of the support for property rights in advanced countries.2 Nonetheless, as China-economy scholar Nicholas Lardy recently pointed out, the private sector is vibrant and tracing an upward trend line. The share of state-owned enterprises in industrial output continues to drop steadily, from 78 percent in 1978 to 26 percent in 2011.3 Private industry far outstrips the value added in the state sector, and lending to private players is growing rapidly.

In fact, much of China’s development model mirrors that of other industrializing and urbanizing economies in Asia and elsewhere. The high savings rate, initial investments in heavy industries and manufacturing, and efforts to guide and stabilize a rapidly industrializing and urbanizing economy, for example, resemble the policies that Japan, South Korea, and Taiwan followed at a similar stage of their development. This investment-led model can lead to its own problems, as Japan’s experience over the past 20 years indicates. Still, a willingness to intervene pragmatically in the market doesn’t imply backwardness or economic management that’s heedless of its impact on neighboring economies and global partners.

Furthermore, China’s reform initiatives4 since 2013 are direct responses to the structural changes in the economy. The new policies aim to spur higher-value exports, to target vibrant emerging markets, to open many sectors for private investors, and to promote consumption-led growth rooted in rising middle-class incomes. Today, consumption continues to go up faster than GDP, and investors have recently piled into sectors from water treatment to e-commerce. These reforms are continuing at the same time China is stepping up its anticorruption drive, and the government hasn’t resorted to massive investment spending (as it did in 2008). That shows just how important the reforms are.

  1. China’s economy lacks the capacity to innovate

Think tanks, academics, and journalists alike maintain that China has, at best, a weak capacity to innovate—the lifeblood of a modern economy. They usually argue as well that the educational system stomps out creativity.

My work with multinationals keen on partnering with innovative Chinese companies suggests that there’s no shortage of local players with a strong creative streak. A recent McKinsey Global Institute (MGI) study describes areas where innovation is flourishing here.5 Process innovations are propelling competitive advantage and growth for many manufacturers. Innovation is at the heart of the success of companies in sectors adapting to fast-changing consumer needs, so digital leaders like Alibaba (e-commerce) and Xiaomi (smartphones) are emerging as top global contenders. Heavy investment in R&D—China ranks number two globally in overall spending—and over a million science and engineering graduates a year are helping to establish important beachheads in science- and engineering-based innovation. (See “Gauging the strength of Chinese innovation.”)

  1. China’s environmental degradation is at the point of no return

To believe this, you need to think that the Chinese are content with a dirty environment and lack the financial muscle to clean things up. OK, they got things wrong in the first place, but so did most countries moving from an agrarian to an industrial economy.

In fact, a lot that’s good is happening. Start with social activism. A documentary on China’s serious air-pollution problems (Under the Dome), by Chai Jing—a former journalist at China Central Television (CCTV), the most important state-owned broadcaster—was viewed over 150 million times in the three days after it was posted online, in March 2015. True, the 140-minute video, which sharply criticizes regulators, state-owned energy companies, and steel and coal producers, was ultimately removed. But the People’s Daily interviewed Chai Jing, and she was praised by a top environmental minister.

China is spending heavily on abatement efforts, as well. The nation’s Airborne Pollution Prevention and Control Action Plan, mandating reductions in coal use and emissions, has earmarked an estimated $277 billion to target regions with the heaviest pollution.6That’s just one of several policy efforts to limit coal’s dominance in the economy and to encourage cleaner energy supplies. My interactions with leaders of Chinese cities have shown me that many of them incorporate strict environmental targets into their economic master plans.

  1. Unproductive investment and rising debt fuels China’s rapid growth

To believe this, you would have to think, as many skeptics do, that the Chinese economy is fundamentally driven by overbuilding—too many roads, bridges, and buildings.7 In fact, as one economist has noted, this is a misperception created by the fact that the country is just very big. An eye-popping statistic is illustrative: in 2013, China consumed 25 times more cement than the US economy did, on average, from 1985 to 2010. But adjusted for per-capita consumption and global construction patterns, China’s use is pretty much in line with that of South Korea and Taiwan during their economic booms.8

China’s rising debt, of course, continues to raise alarms. In fact, rather than deleveraging since the onset of the financial crisis, China has seen its total debt quadruple, to $28.2 trillion last year, a recent MGI study found.9 Nearly half of the debt is directly or indirectly related to real estate (prices have risen by 60 percent since 2008). Local governments too have borrowed heavily in their rush to finance major infrastructure projects.

While the borrowing does border on recklessness, China’s government has plenty of financial capacity to weather a crisis. According to MGI research, state debt hovers at only 55 percent of GDP, substantially lower than it is in much of the West. A recent analysis of China’s financial sector shows that even in the worst case—if credit write-offs reached unprecedented levels—only a fairly narrow segment of Chinese financial institutions would endure severe damage. And while growth would surely slow, in all likelihood the overall economy wouldn’t seize up.10

Finally, the stock-market slide is less significant than the recent global hysteria suggests. The government holds 60 percent of the market cap of Chinese companies. Moreover, the stock market represents only a small portion of their capital funding. And remember, it went up by 150 percent before coming down by 40.

Rumors drive the volatility on China’s stock exchange, often in anticipation of trading by state entities. The upshot is that the direct impact on the real economy will most likely be some reduction in consumer demand from people who have lost money trading in shares.

  1. Social inequities and disenfranchised people threaten stability

On this one, I agree with the bears, but it’s not just China that must worry about this problem. While economic growth has benefited the vast majority of the population, the gap between the countryside and the cities is increasing as urban wealth accelerates. There’s also a widening breach within urban areas—the rich are growing richer.11

Urban inequality and a lack of access to education and healthcare are not problems unique to China. People here and in the West may find fruitful opportunities to exchange ideas because the pattern across Western economies is similar. Leaders of the central government have suggested policies to improve income distribution and to create a fair and sustainable social-security system, though implementation remains a matter for localities and varies greatly among them.

In short, China’s growth is slower, but weighing the evidence I have seen, the sky isn’t falling. Adjustment and reform are the hallmarks of a stable and responsive economy—particularly in volatile times.

From: http://www.mckinsey.com/Insights/Winning_in_Emerging_Markets/Five_myths_about_the_Chinese_economy?cid=other-eml-alt-mkq-mck-oth-1511

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02/11/2015

The power of parity: Advancing women’s equality in India | McKinsey & Company

India has a larger relative economic value at stake from advancing gender equality than any of the ten regions analyzed in a recent McKinsey Global Institute report, The power of parity: How advancing women’s equality can add $12 trillion to global growth.

If all countries were to match the momentum toward gender parity of the fastest-improving countries in their region, $12 trillion a year could be added to global GDP. What’s more, India could add $700 billion of additional GDP in 2025, upping the country’s annual GDP growth by 1.4 percentage points (exhibit).

Our new report, The power of parity: Advancing women’s equality in India, reveals that about 70 percent of this “best in region” potential would come from raising women’s participation in India’s labor force by ten percentage points between now and 2025, bringing 68 million more women into the labor force—70 percent of them in just nine states. This will require bridging both economic and social gender gaps. To determine this, we have created a measure of gender equality for Indian states: the India Female Empowerment Index, or Femdex. Our analysis shows that scores vary widely, and India’s challenge is that the five states with the lowest gender inequality account for just 4 percent of the female working-age population; the five states with the highest inequality account for 32 percent.

Eight priority actions can help accelerate progress, including education and skill-building, job creation in key sectors, corporate policies to promote diversity, and programs to address deep-rooted mind-sets about the role of women in work.

Source: The power of parity: Advancing women’s equality in India | McKinsey & Company

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01/11/2015

Gauging the strength of Chinese innovation | McKinsey & Company

The events of 2015 have shown that China is passing through a challenging transition: the labor-force expansion and surging investment that propelled three decades of growth are now weakening.

Gauging the strength of Chinese innovation

This is a natural stage in the country’s economic development. Yet it raises questions such as how drastically the expansion of GDP will slow down and whether the country can tap new sources of growth.

New research1 by the McKinsey Global Institute (MGI) suggests that to realize consensus growth forecasts—5.5 to 6.5 percent a year—during the coming decade, China must generate two to three percentage points of annual GDP growth through innovation, broadly defined. If it does, innovation could contribute much of the $3 trillion to $5 trillion a year to GDP by 2025.2 China will have evolved from an “innovation sponge,” absorbing and adapting existing technology and knowledge from around the world, into a global innovation leader. Our analysis suggests that this transformation is possible, though far from inevitable.

To date, when we have evaluated how well Chinese companies commercialize new ideas and use them to raise market share and profits and to compete around the world, the picture has been decidedly mixed. China has become a strong innovator in areas such as consumer electronics and construction equipment. Yet in others—creating new drugs or designing automobile engines, for example—the country still isn’t globally competitive. That’s true even though every year it spends more than $200 billion on research (second only to the United States), turns out close to 30,000 PhDs in science and engineering, and leads the world in patent applications (more than 820,000 in 2013). Video   McKinsey director Kevin Sneader discusses global innovation trends at a recent World Economic Forum event.

When we look ahead, though, we see broad swaths of opportunity. Our analysis suggests that by 2025, such new innovation opportunities could contribute $1.0 trillion to $2.2 trillion a year to the Chinese economy—or equivalent to up to 24 percent of total GDP growth. To achieve this goal, China must continue to transform the manufacturing sector, particularly through digitization, and the service sector, through rising connectivity and Internet enablement. Additional productivity gains would come from progress in science- and engineering-based innovation and improvements in the operations of companies as they adopt modern business methods.

To develop a clearer view of this potential, we identified four innovation archetypes: customer focused, efficiency driven, engineering based, and science based. We then compared the actual global revenues of individual industries with what we would expect them to generate given China’s share of global GDP (12 percent in 2013). As the exhibit shows, Chinese companies that rely on customer-focused and efficiency-driven innovation—in industries such as household appliances, Internet software and services, solar panels, and construction machinery—perform relatively well. Exhibit Enlarge However, Chinese companies are not yet global leaders in any of the science-based industries (such as branded pharmaceuticals) that we analyzed. In engineering-based industries, the results are inconsistent: China excels in high-speed trains but gets less than its GDP-based share from auto manufacturing. In this article, we’ll describe the state of play and the outlook in these four categories, starting with the two outperformers.

Source: Gauging the strength of Chinese innovation | McKinsey & Company

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