Growing along with China’s new metropoles
The bad weather in and around Shanghai meant that we left for Amsterdam with a delay of nearly three hours. Having taken in Hong Kong and Beijing, Shanghai was the last stop on our week-long trip to China. I was pretty tired because I really wanted to see the Netherlands play in the World Cup semi-final at 3:30 in the morning (!), so this delay was the last thing I really needed. Our flight from Beijing to Shanghai didn’t leave on time either because the bus that was supposed to take us to the plane had apparently broken down.
The rest of the week when I was out and about with colleagues from our different offices in China went well however. We planned various meetings with Chinese companies as well as regional and local CFOs of European clients so that we could gauge the opportunities for expanding the ING network, both locally and internationally. I was also interested to learn more about the impact of the slowdown in economic growth on our international clients in China. According to a recent report by strategy consultant Roland Berger, European firms in particular were much more negative about short-term prospects in China.
70 cities of one million people planned
Chinese companies are increasingly looking abroad, including at Europe, and scanning the markets there for potential takeovers. Although growth in China is no longer between 10-12%, there is still great demand for various (luxury) products. It is expected that through 2030 almost 310 million people will move to the city. That’s nearly the entire population of the US. These people will live in the 70 (!) planned cities of one million people, which will be in addition to the ten cities that China already has with populations in excess of 10 million.
Jeroen Plag, head of Client Coverage Asia, Americas & UK at ING CB, visited China during the Worldcup
These planned moves, the increase in productivity and more expenditure mean that long-term prospects are good. The expected increase in wealth will see European luxury products remain popular, although a stricter approach to bribery (e.g. alcohol, watches, etc.) has slowed grow. That said, car manufacturers still expect 20-30% growth in the coming years.
Smog and electric cars
One further positive development is the focus on electric cars. The aim is to have five million electric vehicles on roads in 2020, a target that is much needed given that smog remains an ongoing issue in both Beijing and Shanghai. I had the dubious honour of getting to experience the smoggiest day in Shanghai this summer (check out the video). The levels that were measured – and which can be checked using an app on your smartphone – were easily 4-5 times higher than what we Europeans would deem as hazardous for your health.
Opportunities and challenges
The mass of people who are going to move along, potential (property) bubbles, pollution and tensions in the region all pose enough of a challenge for the political regime under the leadership of Chinese President Xi Jinping. According to Yale economist Stephen Roach however, there are enough savings and foreign currency reserves in China to be able to carry out the planned investments. In his recently published book Unbalanced, which is about the relationship between the US and China, he also claims that a growth of 7-8% would be sufficient to maintain the transition from a manufacturing sector to a services one.
This means plenty of opportunities for international and Dutch businesses to prove themselves in China, especially in the field of environmental technology (sustainable manufacturing methods and water in particular) and infrastructure. There are also opportunities in the food supply chain for the Netherlands to offer Chinese consumers the quality and added value they need. Consider the consumer response after the baby food scandals for instance. Being able to offer a specific added value remains key for investments. “Cobbler, stick to your last” is a saying you often hear, so in sectors where Chinese parties are the market leader it would be wise to focus on a niche and not try to conquer all of China.
Another factor to consider in investment decisions back at the headquarters of the major international companies I spoke with is the increase in regional tensions, a subject which is already an important item on the agenda of local and regional offices. During our company visits, US Secretary of State John Kerry and a negotiation team were in Beijing to prepare the meeting between President Xi and President Obama in November later this year. There are already plenty of issues on which the two countries do not agree, and tensions in the region will also be discussed.
In Hong Kong two weeks ago, there were demonstrations about the form of government and the level of autonomy enjoyed there. Recent Chinese campaigns regarding the group of islands that several other Asian country claims are theirs, as well as the opening of a school and the moving of old drilling platforms have led to demonstrations in Vietnam. President Xi’s recent visit to Seoul, before he dropped in on his North Korean ‘comrade’, is also seen as a sign of the changing geopolitical relationships in Asia.
Speaking of tension, there was enough of that during the semi-final against Argentina that the Netherlands lost. Because the match was being shown in the hotel on a Chinese channel, I called home using FaceTime. That way I could at least listen in on the Dutch commentary and experience the excitement at home. Once it came down to penalties however, I switched the sound off; there was a 4-second signal delay in China. When Vlaar missed his penalty, they were all already down in the mouth in Amsterdam, while I was still watching his run-up!
Follow Jeroen on Twitter: @JeroenPlag
Initially published by Dutch daily 'Het Financieele Dagblad', with permission re-published by ING.