Millions of people being relocated from cities, fewer jobs, greater centralization, and more movie blockbusters are just some of the author’s predictions for the year.
1. What might Happen to China in 2016?
By
Gordon Orr
Millions ofpeoplebeingrelocated fromcities, fewer jobs, greatercentralization, and
moremovie blockbustersarejust someoftheauthor’s predictionsfortheyear.
In debates about whether growth is a percentage point up or down, we too often
lose sight of the absolute scale of China’s economy. No matter what rate the
country grows at in2016,its share of the global economy, and of many specific
sectors,willbe larger than ever.My snapshot of China in2016? An increasingly
diverse,volatile,$11trillioneconomy whose performance is becoming more and
more difficult to describeas one dimensional.
The realityis that China’s economy is todaymade up of multiple subeconomies,
eachmore than a trilliondollarsinsize.Some are booming, some declining.
Some are globallycompetitive,others fit for the scrapheap.How you feel about
China depends more than ever on the parts of the economy where you compete.
In 2015,sellingkit to movie theaters has beengreat business,sellingkit to steel
mills less so.In your China, are you dealingwitha tiger or a tortoise? Your
performance in 2016will dependonknowing the answer to this questionand
shaping your plans accordingly.
Many well-establishedsecular trends inChina will continue in2016.The service
economy’s expansionis perhaps most prominent among them. In this piece,as
2. usual, I won’t spendmuch time on the most familiar things. Instead, I will
highlight what I believe willbecome the more important and more visible trends
in 2016,either because they are now acceleratingto scale or a discontinuitymay
become a tippingpoint. (For a quicksummary, see sidebar,“The China Orr-acle:
Gordon’s predictions for 2016.”) Ihope you find my ideas valuable
The 13th five-year plan—few surprises
Much of China’s 13th five-year planwill seemprettyfamiliar,as it has been
flagged in advance at the Fifth Plenum and elsewhere.Perhaps the only
challenge will be to interpretthe plan’s intent clearlythrough the new “party
speak” now coming to dominate government pronouncements.
The GDP growth target will stillbe 6 percent–plus,whichwillbe softeneda bit
but not eliminatedby parallel quality-of-lifegoals: the environment, health,
income, and the like.Achievingthe growthtarget willremainthe core objective
of fiscal andmonetary policies,soexpectlower interestrates andpressure onthe
exchange rate versus the US dollar in2016.Financial reforms aimed at moving
more of the economy towarda market-basedallocationof capital willcontinue.
Meanwhile,there will be more progress oninterest-rate deregulation,onthe IPO
process (registrationrather than approval),onpermittingnew entrants
(especiallyfrom the tech sector and from abroad) intofinancial services,andon
reimplementing laws suspendedinthe summer of 2015.The planwill promote
decentralization,but the realityis likelyto be greater centralization.More
infrastructure will be built,mainly to enhance intraregional development—for
example, around Greater Beijing.
3. Greeninitiatives,reinforcedbyDecember 2015 commitments made in Paris and
the “redalert” inBeijingthat same month, will take center stage. The central
government will make such bigand visible commitments to its citizens that local
authorities willhave to mount a serious effortto deliver.There will be tougher
emissions standards andmore spendingto supportthe development of nonfossil
fuels. Greenfinance willbe available.Bothprivate-sectorandstate-owned
companies will rebrandtheir ongoing initiativesas green.China will explicitly
buildnew export engines from its emerging global leadershipingreenproducts;
for example, expect to see lots of Chinese-made air-filtrationproducts inDelhi
and the restof India in2016.Beyond green initiatives,goingglobal willremain
a key theme, as detailedinthe One Belt,One Road program.1
Finally,the planwillrecognize China’s success inraisinglabor productivityover
the past decade andprioritize the accelerationof productivitygrowth, for both
capital andlabor,from2016 to 2020.The planwill raisethe implications of
higher productivityfor workers: the disappearanceof many traditionalwell-
paying jobs and the need for increasedlabormobilityand for the lifetime
renewal anddevelopment of skills.But I am concernedthat implementation will
be left to local administratorsandthat the regions requiringthe most help will
have the lowestamounts of money to investin reskillingthe workforce andthe
leastimpressive actual skillsto deliver.
Fewer jobs, flatter incomes—and, potentially, less confidence
The workplaceinChina is alreadychanging dramaticallyinways that will create
many individual losers—forexample,workers inindustrysectors insecular
decline (suchas steel or textiles) or in industries where technologyis rapidly
4. displacingpeople evenas output grows (like financial servicesor retailing).The
government must help these workers reskill themselves todeliveronits
commitment that all parts of societywill benefitfrom economic growth and to
keep people activelyengaged in the economy. It willnot be enough for officials
to visitmajor local employers,as they didduring the global financial crisis,and
press them to retainall their current workers.
Official government figures, whichprobablyskew to the positive onjobs,show
that constructionlost15 millionpositions over the past year.Mining, a much
smaller employer,has lostmillions more. Workers from these sectors have few
skills relevantfor the modern service economy, yet many are intheir peak
workingyears.Reskillingmust happenat scale.Noteveryone can delivere-
commerce packages and, besides,the wages from that kind of workaren’tlikely
to bringpeople intothe urban middle class.
Government must persuade the people that it is committed to giving them the
skills they need to be relevantinthe workforce at all stages of their careers.But
for everyone from migrant workers touniversitygraduates,the state educational
system isn’t delivering.China must roll out education,training, and
apprenticeshipsolutions quicklyand at scale to become the moderatelywell-off
societyits leaders aspireto achieve.This willbe both complexand expensive.
Pressure for higher productivityand on jobs overall willleadtolower growthin
household income and, potentially,anerosionof consumer confidence in2016.
Consumer spending has beenresponsiblefor well over 50percentof GDP so far
this year. If the government doesn’thandle less-confidentconsumers quite
5. carefully,the kind of behavior the stockmarket experiencedlastsummer will
roil the broader economy.
The maturing of investing: More options for Chinese investors and foreign
investment managers
Chinese investors todayremaindependent on bank depositsand property.Yet
after the volatilityof the propertyand stock markets in 2015,investors wantto
diversifyinto more stable vehicles.The number of wealthmanagers seeking to
address this need has increasedmassively.Often, their main challenge is not
finding clients but rather credible products tosell.The main challenge for
investors is to find advisersthey cantrust; most simplypush the products that
give them the largestcommission.
Companies are respondingto these developments.Larger wealthmanagers are
moving online to deal directlywithinvestors.Online lendingsites are becoming
broader wealthmanagers and acquiringmutual-fund distributionlicenses.With
interest-rate cuts likelyinthe year ahead,this may be a good time to investin
plain-vanilla bondfunds, whichare easilysoldonline.If retail investors
conclude that the renminbi’s devaluationis a one-waybet, expect a suddenrush
to investin companies that manage nonrenminbi funds. Whatever happens,
sinking money into a second,third, or even fourth propertywill nolonger be a
major wayof investingin China.
Opportunities for foreignfund managers and brokers are growingas a resultof
regulatorychanges, withinternational companies recentlyreceivingapprovalto
open100 percent–ownedinvestment-management operations anda foreign-
controlledbrokerage operation.The historic distributionproblemthat has held
6. backmany funds is beingsolvedas a resultof both the emergence of better
wealthmanagers and the rapidacceptance ofonline distribution,initiallythanks
to Alibaba’sand Tencent’s push into money-market funds.
If your company does go after this opportunity, don’t forget the volatilemind-set
of Chinese investors: ifa product makes a loss,they still expectto be bailedout.
Taking personal responsibilityfor investment decisions isn’twellaccepted.
Foreignfund managers must be preparedtodeal withanger online and in person
when a productthey sell doesn’tlive up to expectations.While I hope that in
2016the government will allowmore investments to fail and will stop
organizing bailouts,progresswill be incremental.
Manufacturing in China is changing, not disappearing
The closelywatchedmanufacturing purchasingmanager’s index(PMI) remains
below 50,whichindicates deterioration,leadingto talk that the country may be
nearingthe end of its time as a manufacturer for the world.Let’s be clear:
manufacturing is not about to become irrelevantinChina. However,the country
is evolvingtowardextremes of performance: the truly awful and the genuinely
competitive.
Many companies—indeedentire sectors—maybe nearing a PMI permanently
below 50,but this doesn’tmean that the emergence of internationallycapable
Chinese manufacturers willdoanything other than accelerate.I wrote twoyears
ago about the lackof marketing skills inmany Chinese companies and their
reluctance to hire functional expertise outside their existingnetworks.That has
changed incrediblyquickly.Chinese CEOs incessantlyask me for names of
7. functional experts,especiallyindata,marketing, and specific international
markets. It’s great to see the follow-throughand the hiring.
In 2016,we will realize that in many parts of the economy, a smaller Chinese
manufacturing sector is actuallya stronger global competitor than ever before.
One indicator will be more international acquisitions byChinese manufacturers.
A secondwill be more multinationals blaming their lower growthnot just on a
slowingChinese economy but also,specifically,onlocal competitors that are
moving upmarket to gain share inside and outside China.
Some manufacturing sectors inChina do have massive overcapacityand many
mediocre producers.But the country alsohas successful innovators inmany
industries,some highlighted inthe recent MGI report The Chinaeffect onglobal
innovation.Byaggressivelyadoptingwhat we might consider Western
concepts—leanand modular design, scaledlearning,agile manufacturing, and
intelligentautomation—many companies are combining low costs with
aggressive innovation.Their skills are spreadingwidelyacrossChina’s
manufacturers.
Multinationals inChina are facing up to this double challenge of lower growth
and better local competition.A few are quietlyexiting; I have met excited
private-equityinvestorsnegotiatingto buy their assets.More are adjustingtheir
aspirations from“investfor the future” to “make money today” and lowering
their coststructures to match. Some will move aggressivelyonthe front foot. In
2016,more multinationals will attempt to purchase Chinese competitors—ifyou
can’t beat them, buy them.
8. Agricultural imports are rising and rising
In 2016,China’s growingfood needs will drive agricultural imports to record
highs in both volume and value.A wider range of countries than ever before will
find agricultural-exportopportunitiesthere.
Russia is one example. Its reorientationtowardChina,followingthe imposition
of Westernsanctions,has taken time to playout inagriculture—border
inspectionpoints and the like had to be scaledup. (This reorientationhappened
much more quickly withoil;China reducedits dependence onthe Organization
of PetroleumExportingCountries to around 50 percent,from more than 65
percent,largelyby increasingimports from Russia.) Nonetheless,Chinese
imports of grainand oilseedfromRussia reached500,000tons inthe first nine
months of 2015,comparedwithjust 100,000for all of 2014.Even significant
volumes of cornfrom Ukraine are pragmaticallyfindingtheir wayacross Russia
and into China.
The full impact of the free-tradeagreement withAustralia won’tbe seenuntil
2016.I expect rapidgrowth,particularlyinmeat. The Australiangovernment’s
recent decisionto turn downan investment on national-securitygrounds will
only temporarilydeter Chinese investors fromputting more money into
Australianagriculture.Several hadpreviouslymade approvedinvestments,and
others are sounding out international partners to investjointlyinnew Australian
projects.And a more economicallystable Argentina will compete withAustralia
to providebeefto China and withEthiopia to provide alfalfa atscale to feed
China’s dairyherds.
9. After a pause in 2015,US farmers should increase their exports to China not just
in soybeans (historicallymore than 40 percentof US agricultural exports tothe
country by value) but alsoin cereals,intermediate goods,and,especially,
brandedprocessedfoods.These might be solddirectlyto middle-class
consumers through the growingonline market for groceries.Foodsafetywill
remaina theme that benefits US and other international producers ofbranded
foods.
More centralization
The Chinese media,especiallyduringPresidentXi’s increasinglyfrequent trips
abroad,made it clear that economic decisionmaking has beencentralizedover
the past twoyears.China will become still more centralizedin2016,rollingback
decentralizationwhere ithad unintended outcomes. For example, after local
governments receivedauthorityto approve new power plants,more than 150
new coal-firedones were green-litinthe first nine months of 2015—more than
three times the number approvedin2013,under the oldcentralizeddecision-
making process.Unsurprisingly,coal-producingareas grantedthe largest
number of approvalsfor plants that weren’trequiredunder any realisticdemand
projection,evensetting aside the questionof whether any new plants at all
should be coal fired.State-ownedenterprisesare behindmost of these projects
and wouldexpectto be bailedout if they fail.Thus, for multiple reasons,such
decisions willbe recentralized.
A secondexample is pensions.Mainland pensionfunds are still controlled
largelyat the provinciallevel,but shortfalls are coveredbythe center. That gives
local governments little incentive to improve their investment performance—90
10. percentof the assets are heldin bank deposits.The coming centralizationwilltry
to remove perverseincentives andto professionalize the overall approachto
investments. Already,Guangdong and Shandong have entrusted part of their
assets to the National Council for Social SecurityFund. More regions will follow
in 2016.
The consolidationof state-ownedenterprisesto create fewer but larger
companies,eachpossiblydominating its industry, is a third example. And
increasedideologicalconformity, as demanded by the Communist Party’s new
rules,is almost by definitioncentralizing;people lookto the top for approval of
not just what they do but alsoof what they sayand how they sayit.
A major test of centralization’seffectivenesswillcome if consumer confidence
starts to decline in2016.Will the central government be able to pull the right
levers quicklyenough to create a good outcome nationwide? Noone set of
levers is likelyto be fit for purpose across the entire economy. There willbe no
greater test of economic competence.
Moving people at scale—the middle class, not peasants
Despite prodigious investment,many Chinese cities cannot buildenough quality
infrastructure to avoidmassive day-to-daycongestion.Even though the new
five-year planwillcommit the country to buildmore of it, that will not solve
these problems;growthhas simplyoutstrippedpotential solutions.For example,
Beijing’s populationofficiallygrew by 60 percent,to 21 million,in just the past
14 years—andunofficiallyby significantlymore.
11. Wealthier cities willseekto follow Beijing’s leadintransferringlarge numbers
of jobs and people out of citycenters.In Beijing’s case,this policyhas not
involvedmoving migrant workers but rather 400,000to 2 millionmiddle-class
residents—dependingon whichversionof the planyou lookat—by shifting
many government offices out of the city center.Attempts to create satellite cities
have generallyfailedto date; people have moved but jobs haven’t,so the
satellites have become dormitorycommunities for commuters who add to the
dailytraffic congestion. Beijingis privilegedinhaving money, land,and
millions of government workers itcan directtomove, but other cities willstudy
what happens there and emulate it if they can find enough land.
Movies in China: $$$
A Chinese movie willgross $500milliondomesticallyin2016.As a benchmark,
the highest-grossingmovie of all time on US domestic screens is Avatar,at $760
million.This year’s leadingdomestic productions inChina were Monster
Hunt (whichhas grossed$380millionas of September) and Lost in Hong
Kong (more than $200 million).The leadinginternational movie, Furious 7,
grossedalmost$400 millionin China. The country’s box office has beenset to
grow by almost 50 percentin2015,and new screenadditions alone should
deliver20percent–plus growthin 2016.More than half of the top-tenmovies for
2015(as of late November) are domestic productions,and 60 percentof the box
office comes from Chinese movies. The country’s producers anddirectors have
clearlytappedinto what excites local moviegoers (andwhat censors permit).
A riskto this rosyscenariocomes from online movies, whichare growingeven
more quickly. Legendof Miyue,an81-episode historicaldrama,was recently
12. launched, simultaneously, on broadcastand online channels through Tencent
Video and LeTV. It attracted700 millionhits online injust 24 hours. No wonder
Alibaba has investedmore than $4.8billionina leadingvideoplatform.
Consumers seemto want both the cinema and the mobile-deviceexperience.I
believethis trend will continue, and we will see new milestones for the big
screenin2016.
China continues to go global, withthe United Kingdom as a new focal point
China’s outbound investment will acceleratein2016,withOne Belt,One Road–
relatedinitiativesdrivingmuch of it. A seconddriver willbe distressed-asset
acquisitions in basic materialsand relatedsectors:Chinese acquirers mayplan
not to extract the assets inthe near term but simplyto stockpile them as long-
term insurance.Finally,a growingshare of the acquisitions willcome from
private-sectorcompanies that aspireto global leadership.These companies are
increasinglysophisticatedbuyers,conductingqualitydue diligence,working
withtraditionaladvisers,andfocusing on countries where they think that warm
political relations will make it easier todo deals.
In 2015,for example,the politicalrelationshipbetweenChina and the United
Kingdom reachednew highs, cappedby PresidentXi’s extended visitto Britain
in October.Chinese investment in that country is spreadingwell beyondflagship
properties—tosectorsrangingfrom automotive to luxury yachts to oil to pizza—
withthe goal of acquiringtechnology, brands,talent,and market access.These
moves buildoff investments in all long-establishedUK industrial companies
withbases far from London.
13. Followingthe confirmationof a nuclear-powerdeal,there’salsoa perceptionin
China that almost no acquisitioninthe United Kingdom will be blockedfor
political reasons.Onalmost everytripthere, I cannow be certainto meet
multiple Chinese private entrepreneurs lookingfor investments and partnerships.
In 2016,I anticipate large financial-sectorinvestments as London moves to
become a leadingrenminbi offshore market and possiblyalsoChinese
acquisitions of UK assetmanagers. There is growinginvestment in UK research
as well.Expectannouncements of partnerships betweenChinese private-sector
companies and leadingUK universities,especiallyinmedical,biotech,and
advancedmaterials.
Other countries willseekto emulate this path to attractingChinese investment at
scale.
And finally . . .
My enduring predictionthat bigbusiness wouldembrace soccer inChina has
finallybeenrealized,evenif that happened more slowlythan I expected.
FootballerSergioAgüero,of Manchester City Football Club,took what became
one of the world’smost sharedselfies,withPresidentXi and BritishPrime
Minister DavidCameron. It seemed only a matter of time before Chinese capital
(specifically,China Media Capital andCITIC Capital Holdings) investedin
Manchester Cityand its global networkof teams, whichincludes the New York
City Football Club.Other leadingteams are exploringhow to participate in
China. Arsenal Football Clubhas a multiyear grassroots programinplace,as
does Real Madrid.And outbound investment in soccer is growing,highlighted
when Wanda Group bought into Atléticode Madridin2015.
14. Most important, TV rights to Chinese soccer soldfor $1.2billion,up 20-fold
over the previous contract.Real money is now flowinginto the domestic game. I
believethat we will finallysee other qualityteams emerging to compete with
China’s onlysuch clubtoday, Guangzhou Evergrande TaobaoFootball Club,
and that problems withmatch fixing and gambling-drivencorruptionwill end.
I won’t predictwhenChina will winthe WorldCup. Realistically,itwill qualify
for the next couple of tournaments only if FIFA goes ahead withits idea of
increasingthe number of participatingteams to 40. But as the example of
England proves, not winning international competitions is no barrier tohaving a
highly successful,incrediblyvaluable domestic soccer league.In 2016,China
canreallystartto move in that direction.
As always,don’toverfocus on short-termnoise about Chinese GDP growth. Try
to identifythe medium-term directionof the parts of the economy relevantto
your business.EnjoyChina in 2016!