Deloitte says continuous reform and transformation to render strong Chinese performance

Published 23 October 2018

In 2017, the fourth year of its 'New Normal', the Chinese economy maintained stable growth while seeking stronger momentum from innovation and industrial upgrading. With 2018 marking the 40th year of reform and opening-up, changes to China's economic landscape will continue to foster a world-class business environment by incentivizing innovation, lowering barriers to market entry and promoting fairer competition among all players, according to Deloitte's 2018 China Factors – A guide for investing in China.

China Factors is a publication of the Deloitte Global Chinese Services Group (GCSG), which advises Chinese companies expanding their global presence and multinational companies operating in China. In this latest edition, GCSG delves deeper into the local market landscape, analyzing key industries offering potentially lucrative opportunities for foreign investment.

The Chinese economy is likely to decelerate in 2018, and possibly in 2019, due to a slew of factors, Deloitte forecasts.

"Preventing financial sector risks has been one of top items on the policy agenda in recent years; therefore, to rein in credit growth, which means tolerating a slower GDP growth target, is necessary. We expect policymakers to de-emphasize the GDP growth target. As such, policymakers will increase their policy leeway in order to undertake deleveraging initiatives and SOE reforms," says Deloitte China Chief Economist Sitao Xu.

Opportunities will continue to abound in several growing sectors. Confident consumers, combined with consumption upgrading supported by economic transformation, will bring more opportunities in retail. Meanwhile, technological innovations, especially artificial intelligence and internet plus, are prompting faster growth in emerging sectors. The closely watched 19th Party Congress in October 2017 reemphasized China's commitment to building a more conducive environment for technology, adding further rigor to an already dynamic tech sector. That said, rising global protectionism and China-US trade friction are casting a shadow over exports, China's traditional growth driver. Tariff hikes are piling pressure on China to further open up its domestic market, especially in the manufacturing, auto, service and financial sectors, making it difficult for companies to make key decisions, particular on their supply chains. It is not only the US putting pressure on China to level the playing field, concerns about market access reciprocity are widespread.

"The best policy response would not be tit-for-tat tariffs but rather concrete steps in opening up domestic markets, service sectors in particular, within a clearly defined timetable. At the same time, improved market access will also defuse trade tensions," adds Xu.

The Chinese government is committed to improving the investment environment. Several laws have been amended to improve conditions for foreign investors, with a raft of policies and measures formulated to level the playing field between domestic and overseas businesses. Opening-up is also expanding from pilot zones to other cities and China's hinterlands. The Guangdong-Hong Kong-Macao Greater Bay Area (GBA) and Belt and Road Initiative (BRI) are also providing new access points for foreign investors eying China.

According to the guide, emerging technologies and innovation will drive the development of most industries. With the support of the Chinese government, the AI industry will redouble its efforts, aiming to create a USD150 billion market by 2030. In the media sector, China will continue to be the top market for live streaming, attracting an estimated 456 million viewers and USD4.4 billion in revenue in 2018. Meanwhile, 5G will be fast-tracked, with an expected launch in 2020 accruing one billion Chinese users by 2023.

Online retail, driven by a consumption boom, grew 28% in 2017, and its penetration rate is expected to exceed 20% by 2020. Smart manufacturing, with an additional 100 pilot demonstration projects, is well on track to achieve the targeted RMB3 billion by 2020. As technology becomes deeply entrenched in every industry, the amount of user data will increase with startling speed.

"The sheer volume of data can be a distinct advantage but also a challenge. Considering China’s population and the scale of its manufacturing industry, Chinese enterprises have natural advantages. For example, advances in machine learning are heavily reliant on data volume. However, capitalizing on that data is another matter. Companies should work closely with data analytics specialists to figure out customized solutions," explains Deloitte Global Chinese Services Group Partner Johnny Zhang.

As well as industry outlooks, the guide book also features a collection of regional economic indicators for quick reference, covering Beijing, Tianjin, Liaoning, Heilongjiang, Shanghai, Shandong, Jiangsu, Zhejiang, Hubei, Sichuan, Chongqing, Guangdong, and Fujian. It also briefly discusses inbound investment-related tax issues and preferential tax treatments under the Enterprise Income Tax Law.