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In the Year of the Dragon, 2012, China’s rapidly growing consumer economy will change the nature of global business opportunities. “In China for China” is an increasingly important strategy for companies to embrace, versus just sourcing from China. As the shift to more strategic sourcing expands, improving supply chain effectiveness will be essential to achieving higher performance as margins are squeezed and retail networks expand. Now more than ever, companies need the right people, the right technology and best practices in place to be competitive in China. The top nine trends in China for 2012 are:Economic growth. This is likely to drop about 1 point in GDP from its 2011 position of just above 9%, with a continued focus on domestic demand growth. There is expected to be some sort of government stimulus, and infrastructure investment and retail spending should remain strong. Industrial production growth will slow. Government will enhance emphasis on sustained growth and job creation. Currency fluctuation. A continued modest appreciation of the Yuan to a level nearing 6.0 to the US dollar by the end of 2012 is anticipated, after about a 4% appreciation in 2011. We can also expect increasing exchange rate flexibility to replace the recent trend of Yuan appreciation as the key direction. Government may allow the Yuan to even weaken a bit for a period of time, depending on the tempo of US economic recovery and settlement of the Euro Zone debt crisis.
Policy reforms. Some key reforms will be pushed forward in 2012, including converting the business tax to VAT in service areas, expanding the property tax pilot program, fully reforming the resource tax system, deepening energy price reform, pushing interest rate liberalization, and further developing capital markets. Tax reduction is also becoming a hot topic as an alternative means to stimulate growth and restructure the growth paradigm. Politics. This is predicted to be a year of leadership change: President Hu Jintao and Premier Wen Jiabao will step down from their Communist Party posts at a Party Congress to be held in late 2012. The National People's Congress (parliament) will officially install their successors in early 2013. In a year of transition for new leadership, maintaining stability (politically, socially, and economically) will be the central theme (as reflected by a government statement released after the annual 2011 “Central Economic Work Conference”). M&A. Expect a continued focus by foreign companies as a means to accelerate growth and access new markets, as well as by domestic firms to exploit trends in industry consolidation. There will be a special emphasis on consumer/retail segments, especially by private equity. Sourcing. A general increase in operating costs due to both inflation and Yuan appreciation is forecast. There will also be a continued shift away from sourcing high labor/low value products, which will continue to migrate to other low cost countries (LCC). Labor rates will continue to rise in double digits, increasing both consumer economy and prices. Changing labor rates are encouraging people to “stay near home,” creating new sourcing opportunities away from places like Shenzhen and Shanghai. US company activity in China. China will remain a top foreign market for investment. Financial performance of China-based operating companies is expected to remain strong overall comparing favorably to corporate averages. The trend will be continued emphasis on capturing the Chinese consumer spend. Chinese company emigration. Expect a ramp-up of investment by Chinese companies in the West through both organic and acquisition activity. Also look for an increase in outbound deals as Chinese companies seek to deepen positions off-shore and shift away from a pure exporting platform.
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Trade. This area will continue its softening trend of 2011, with possible flat performance in exports and only moderate growth in imports. The trade climate is highly dependent on the Euro Zone final resolution and sustained recovery in the US. In addition, ongoing anti-China trade rhetoric could lead to some friction. 