Big change and China’s economy

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Author: Fan Gang, President of China Development Institute

Editor’s Note: At "Global Venture Capital Conference 2020" held in Qingdao on 9th May, Prof. Fan commented on the big change and China's economic future.

Uncertainties continue to increase as the pandemic swept the world. The undetermined probability made it extremely difficult to conduct risk assessment, economic analysis or judgement. Hence, caution should be exercised in any analytical effort towards economic trends. Countries ought to apply bottom-line thinking and pay close attention to how the pandemic progresses.

With the tendency to becoming a norm, the pandemic’s side effects include interruption of supply chain and the resulting food crisis. Agricultural production reduced dramatically as they could not be transported to the destination country. On the other hand, quarantine dictates that labor-intensive industries, including food processing factory, halts operation. Subsequently, global food supply is greatly affected.

China’s economy is also facing a lot of uncertainties, especially in terms of international politics, e.g. decoupling and desinicization. Trump administration has been pressing on Sino-US trade issues, undermining the development of Chinese companies.

Although it could be positive while quarantine ends and the market, revives, China’s economic growth would barely reach last year’s figure. Currently manufacture industry and infrastructure are seeing a relatively fast recovery, with service sector lagged behind. However, be that as it may, the bounce back would not be able to make up for first half’s loss.

In a time that huge changes to global economy structure are taking place, new business adventures are in order. Industries such as IT, AI, biotech, pharmaceutics and public health are currently under the spotlight. However, two other areas should be taken a closer look.

First, general consumer goods industry still has huge potential in store. GDP per capita of China reached 10,000 US Dollars last year. In both theoretical and practical sense, such phenomenon indicates that China is entering the high consumption stage characterized by higher proportion of expenditure and lower proportion of savings to income.

After a short decline in second quarter, consumption will bounce back once quarantine ends. In addition, the poverty-stricken areas of China are gradually embracing a moderately well-off society and the low-income groups in rural areas and small cities are exhibiting larger capacity for consumption as well. If and when this trend extends to the entire population of 1.4 billion, the potential is enormous.

Second, industrial restructuring. Not all the manufacturing enterprises are the right choice for investors. Many industries have massive potential, but are shackled by overcrowdedness and excessive competition. As a result, orders are scattered within the industry, making it difficult for enterprises to achieve a scale-based development and stand out. However, there are a small number of well-performing enterprises in each industry. Given the past case of overheated economy and excessive investment, restructuring is imperative for most industries. As enterprises with few orders continue to be wiped out during this pandemic, those in good shape will pick up more orders and become suitable candidate for investment.