25 May 2014
China's key growth industriesEnergy, environmental protection, and healthcare are three key growth industries in China, according to Frost & Sullivan.
What are Emerging Markets and why do they Matter?Emerging markets are primarily those low-medium income economies that are in the process of rapid growth and industrialization. These markets are driven by characteristics such as favorable demographics for business ventures, higher returns on investments and low costs of production. In order to attract investments from non-residents and foreign investors, these markets are more favorably deregulating their financial systems.
FDI inflows into these economies almost doubled between 2004 and 2013. In 2013, emerging markets claimed almost 61 percent of the world FDI inflows; a staggering amount of $ 0.915 trillion (UNCTAD). After the 2009 global economic crisis, emerging markets had a hard landing owing to a combination of external shocks. Nonetheless, resilient domestic demand helped the economies to not only sustain healthy growth but also accelerate global recovery. Going forward, they are expected to grow at an annual rate of 5.5% between 2014 and 2020 as opposed to expected global average of 3%.
Inadequate infrastructural support, wide spread inequality, corruption, political uncertainties are some of the downside factors that are likely to slowdown growth in emerging markets in short-run.
What is Driving Opportunities in China?China is one of the fastest growing economies in the world in terms of real GDP growth. It is well-known for its cheap yet highly profitable investment opportunities. Strong GDP growth in the past three decades can largely be attributed to availability of low-cost resources and highly effective government policies.
· In 2013, China’s public debt-to-GDP ratio is among the lowest in the world at 22.9%, and the gross domestic capital formation is as high as 50% of GDP (IMF).
· China is the world leader in exports of goods and services. Exports, valued at $2.210 trillion in 2013, accounted for 25.1% of GDP.
· China has the largest market in the world for mining and ore-processing; construction; and manufacturing comprising electronics, chemicals, apparels as well as automobiles and ship building.
· Urbanization has changed China’s landscape in the last thirty years. Rising middle-class population is likely to transform China’s consumer demand structure in the next 10 years; conforming to that of developed nations.
· China maintains strong bi-lateral relationship with the USA, Eurozone, Japan, Africa and the other emerging economies. Strong ties developed with Russia and the Middle-east Asian countries provide China the opportunity to meet its enormous energy-import demand in exchange for goods and services.
China’s current development strategy focusses not only on economic growth but also better standard of living for its nationals. Rapid urbanization is expected to open up further investment opportunities as well as boost consumer demand in China.
Macro-Economic OverviewChina is on course to become the largest economy in the world and should surpass the United States by the early 2020s. In 2013, China’s GDP grew by 7.7% and stood at astounding $13.370 trillion. High investment demand and manufacturing exports remained its prime growth drivers in the past two decades. The 12th five year plan of China focusses on striking an effective balance between real growth in output and environmental and social concerns. To this end, the Chinese government adopted a mix of social and economic reforms in 2013. This reform-based economic transformation is likely to ensure long-term sustainable growth. Gradual liberalization of the Chinese economy is anticipated to further increase China’s attractiveness in the global front. This would encourage higher investment into research and development as well.
· Radical reforms in the financial sector are likely to gradually strengthen and improve transparency in the credit market of the economy.
· The State Administration of Foreign Exchange (SAFE) removed 24 regulations on FDI in May 2013 to boost FDI as well as monitor suspicious investments. Despite global uncertainty, foreign investments into China rose by about 5.9% in 2013.
· In order to reduce demographic pressures on the economy from the aging population, the government has terminated its one-child policy in 2013. Social security schemes have been modified as well. These are likely to boost consumer sentiments in the short run.
In a bid to transform the economy from a low-cost manufacturing to a high consumption economy, the Chinese government is expected to continue with its unflinching social and economic reforms. From a short-term perspective, unexpected policy reforms might prompt the foreign investors to consider the economy’s prospects with guarded optimism.
Key Growth Industries in the Next Five YearsUnder the 12th 5-year plan (2011-2015) of China, 7 strategic industries have been acknowledged as high priority sectors -- Biotech, Information Technology (IT), new energy, environment protection, alternative fuels, new materials and high-end manufacturing. Also, the Ministry of Industry and Information Technology announced merger activities across 9 industrial sectors to promote competitiveness. The industries include steel, automotive, cement, shipbuilding, electrolytic aluminum, rare earths, cement, electronic and information, pharmaceutical, and industrialized agriculture.
Energy and Environmental ProtectionChina is the most populous nation in the world. Power consumption demand by China’s industrial sector is almost twice of that of the developed nations. In 2013, 60% of the domestic demand for energy was met by imports; natural gas being the highest component. China’s energy consumption per capita is not only the highest in the world; but also the rising pollution level in the major Chinese cities from the coal-fired power stations is becoming evidently alarming.
. The Chinese government introduced environmental taxes in 2013 to curb the excessive green-house emissions from the industries.
. Natural gas imports of China increased by 25% in 2013. The 12th 5-year plan of China aims to produce 100 billion cubic meters of natural gas in 2014 in order to reduce the economy’s dependence on fossil fuels.
. 2013 onwards, reduced government control over the pricing of water, fuel, and electricity is expected to encourage private participation in the energy sector.
An urgent need to develop alternative sources of energy has led China to invest heavily on the renewable and unconventional energy sector in the last five years. Going forward, this is likely to augment innovation and green-technology developments further. As of now, China accounts for 30% of the total investment in renewable energy globally, and it is expected to spend up to $290 billion by 2015.
. Renewable output doubled in 2013 and is expected to continue to increase robustly between 2014 and 2020 because of increase in government investment in new energy projects and various stimuli measures.
. After the United States, China is the second country in the world that started exploration and production of shale gas. Shale gas production in China is expected to reach 6.50 billion cubic meters in 2015 from a meagre 200 million cubic meters in 2013.
Increase in private investment in the energy sector is expected to replace outdated infrastructure and production methods by technologically-advanced methods of production. This is likely to immensely increase the efficiency and, hence, the energy output in the medium-long term.
HealthcareChina’s healthcare sector is currently growing at the fastest rate amongst all other emerging economies. Rising middle-class population and their lifestyle changes are the major factors behind the rapid growth in healthcare spending within the economy. Total healthcare expenditure doubled between 2008 and 2013 from approximately $210 billion in 2008 to $430 billion in 2013. This is expected to reach $1 trillion by 2020. Under the 12th 5-year plan, the government is spending heavily on development of the state-level medical facilities such as construction of new hospitals, refurbishment of the existing hospitals, and recruitment of well-trained physicians to name a few. This provides huge opportunities to the multinationals as well as local producers to benefit from the expanding market.
. Healthcare reform in 2009 ensured basic insurance coverage to almost 97% of the total population. To this end the government spent around $200 billion since 2009. This largely increased the market scope for the medical devices and pharmaceuticals companies in the Chinese economy as well.
· Regulations and barriers to entry into the Chinese healthcare sector were the major challenges prior to 2011. Since 2011, China is allowing Wholly Foreign Owned Entities (WFOE) to operate in the domestic healthcare sector. This is steadily attracting leading foreign players into the sector.
· Foreign pharmaceutical giants such as GlaxoSmithKline (GSK), Pfizer (PFE), and Merck (MRK) entered into the Chinese market and their sales grew by more than 30% annually between 2009 and 2013.
· Alongside the foreign enterprises, the generic drug makers have benefitted from the Chinese healthcare sector boom as well in the last decade. Demand for generic drugs has been rising at per with the rise in national income.
· Despite a slowdown in industrial production of China in 2013, the pharmaceutical industry managed to generate revenue of approximately $355 billion in 2013, a y-o-y growth of 15%.
In order to safeguard rapid industrialization and urbanization, the healthcare sector was largely neglected by the Chinese government. Only recently, pro-healthcare policies and regulations have been implemented by the government to ensure social development. Thereby, the healthcare sector of China is in its premature stage of development and is likely to provide immense growth prospects to all the ancillary industries as well in the next decade.
Moving ForwardEmerging markets are characterized by huge untapped market potential. At the same time, given the political uncertainties, infrastructural shortcomings, and currency fluctuations, risks involved in doing business in these markets are slightly high. Foreign investors are likely to benefit from these opportunities if they follow a strategic approach that is most relevant to the specific market.
The transition of China from a low-income economy to a middle-income economy since 1990s had been fuelled by low-cost manufacturing. Since 2012, China’s attractiveness as a low-end manufacturing base is on the decline due to rising labor costs, land and resources. This, alongside global economic slump, led to a slowdown in economic growth of China. To sustain investors’ confidence in the economy, President Xi Jingping has been focusing on domestic market growth, balanced trade, cheaper housing and infrastructural development.
The Chinese government is striving to transform itself from a middle-income economy to a high-income one. Heavy investments into healthcare facilities, green-technologies, eco-friendly infrastructure and high-end manufacturing are expected to pave the way for the government’s optimistic goals. Over the next two decades, GDP growth of China is expected to remain contained at 7-7.5%, but social development and urbanization is likely in full swing.