Deloitte says “New Normal” gives rise to new optimism for China’s economy

Published: 27 May 2016

Following nearly 15 years of rapid expansion, China’s economy has entered a new stage characterized by somewhat slower but stable growth, which many describe as China’s “New Normal.” Despite scepticism about China’s economic prospects under the “New Normal”, there are grounds for optimism for many industries in China as the government supports a shift toward a service-driven economy and encourages companies to move up the value chain, according to Deloitte’s recently published China Factors – A Guide for Investing in China.

The China Factors was put together by Deloitte Global Chinese Services Group (GCSG), which provides support for companies engaged in cross border investments and business between China and the United States. In this new edition, CSG delves deeper into the local market landscape, analyzing key industries that are offering lucrative opportunities for foreign investment.

Sitao Xu, Chief Economist of Deloitte China said, “A slowdown in growth rates is an inevitable part of the development process. Over the past two decades, China has been a rapidly developing economy driven by investment in heavy industry and low cost exports. As China enters its ‘New Normal’ phase, priority must be given to support a smooth transition to a mature economy, led by domestic consumption and higher-value goods and services. China’s rapid growth has given rise to many challenges, and as the country is moving from middle to high income status, significant policy adjustments are required in order for its growth to be sustainable.”

To stand out in the fast-evolving world, enterprises need to not only sharpen their business-area-specific expertise, but also have foresight to predict future trends. In this regard, the report sheds light on several key industries (manufacturing, pharmaceutical & healthcare, automotive, information technology, express delivery, and retail) that represent China's economic pillars and provide foreign investors with substantive business opportunities.

According to the guide book, innovation is a major theme for many of the industries. For instance, many manufacturing companies are now rapidly adopting automation technology, which enables them to cope with escalating costs and higher quality requirements, and respond to customer needs and external disruptions. Against this backdrop, it is expected that the industry output value of China’s smart manufacturing will exceed RMB 3 trillion by 2020, versus RMB 1 trillion in 2015. In the information technology industry, Internet advancements have created unparalleled opportunities for investors, and 54 percent of China’s venture capital funds flowed to the Internet industry last year. Information technology has also been adopted for the development of “Smart Cities,” which play a role in supporting the government’s philosophy to count on further urbanization to fuel economic growth.

“Another interesting phenomenon is that mergers and acquisitions are quite active in many industries, including manufacturing, pharmaceutical, automotive, and express delivery. In some industries, mergers and acquisitions enable companies to expand their market shares. On the other hand, mergers and acquisitions also provide the solution for overcapacity and eliminate the less-competitive medium and small sized companies in the face of rising costs and margin squeeze,” said Rosa Yang, Chairman of Deloitte Global Chinese Services Group.

According to the guide book, internet and e-commerce are shaping the future of these industries. For example, the Internet has enabled retailers to offer omni-channel shopping experiences, including online platforms, which increase convenience for customers. The popularity of online shopping, both domestic and cross-border, has also increased demand for express delivery services. In 2013, sales revenue from China’s online shopping was RMB 1.84 billion, with a CAGR of 70 percent over the past five years.

The guide book also briefly covered tax issues that are relevant for cross-border transactions in China, as well as preferential tax treatment under the Enterprise Income Tax Law. It also provided snapshot summaries of the local economic and investment environments in major cities and regions in China, including Beijing, Tianjin, Liaoning, Heilongjiang, Shanghai, Shandong, Jiangsu, Zhejiang, Hubei, Sichuan, Chongqing, Guangdong, and Fujian.