China’s Burgeoning Economy

What prospects does China’s boom hold for eager entrepreneurs?

The Beijing skyline at night.

Business leaders in the West have long been looking east. From the times of Marco Polo, untapped markets in China have been a horizon of prosperity. With an economy slated to become the strongest in the world within the next two decades, the most populous country on the planet continues to whet the appetite of hungry entrepreneurs.

China’s explosive growth, however, has not held the same returns for outsiders as for the nation itself. Although the percentage of people living below the poverty line in the country has fallen from 64 percent to less than 10 percent in the last 35 years, that line is crossed by merely consuming living expenses of greater than $1 per day. The vast majority of China’s citizens do not yet have the buying power that one might expect from residents of a leading nation. With easily accessible numbers, the mobile phone market serves as a quick litmus test.

Reuters reported in February that mobile phone subscriptions in China hit 987 million the month prior. That’s a number over 70 percent of the country’s population. It’s an understandable figure given that even among China’s more rural population, 160 million migrant workers are regularly employed in the urban industrial zones. The 70% figure doesn’t mean, however, that over two-thirds of the population have cell phones. In wealthy Hong Kong, for instance, there are nearly two mobile phone subscriptions per person. Even the U.S. reports slightly more mobile phone subscriptions than its population though a noticeable minority still go cell-phone free.

What it does mean is that there is room for market growth. Over 400 million cell phone subscriptions will need to be sold in China before it rivals the United States for number of mobiles per capita. What’s more, less than 14 percent of China’s subscribers use a 3G network. The rest cannot access the Internet on their phone unless they can connect to a WiFi hotspot.

In part, this is because the networks are not sufficient to support data usage in many areas of service. Looking at the growth in the use of high-end mobile phones, however, Gokul Hariharan, an analyst for J.P. Morgan in Hong Kong, told Reuters in January, “I don’t think [network compatibility] is an issue which could be a real hurdle”. Coverage area of the networks that allow access to Internet data are increasing throughout China’s population centres. As network coverage of 3G slowly grows, more and more mobile phone users will want to upgrade their hand-held devices to gain access to the Internet on the go. The question, however, is whether or not they can afford it.

Though China is boasting the world’s second highest GDP and some estimate it may even surpass the U.S. within 15 years, its wealth is not in the hands of consumers. Per capita, its GDP is actually ranked 91st in the world, less than a ninth that of the U.S. according to the International Monetary Fund’s estimates for 2011. China’s prosperity looks less impressive when compared to the number of people who must share it. Despite the growth of the last two decades, China still remains behind in the relative wealth of its citizens.

In addition, the country’s capital is not exactly shared evenly. The ratio of the average income of the top 10 percent to that of the bottom 10 percent in China is approximately 21.6 to 1, according to the United Nations Human Development Report of 2009. In comparison, the U.S.’s ratio is 15.9 to 1 and had income discrepancies great enough to spark mass protests in 2011. On the other hand, Japan, the country with the third highest GDP, has an astounding ratio of 4.3 to 1.

China’s incredible economic growth of the last two decades have brought much of the country out of extreme poverty and put incredible power in the hands of its government, but it has not caught the country up to the standards of living of the West. The income equality figures above fail to represent the amount of income of the state in comparison to its people. Compounded with China’s relatively low GDP per capita is the amount of wealth that ends up being spent by its government rather than its citizens. Though “440 million Chinese have lifted themselves out of poverty … over the last two decades”, The Economist reflected in January that “China’s banks shovel workers’ savings into state-owned enterprises, depriving workers of spending power and private companies of capital.” Despite China’s booming GDP, the average person in China is supporting the economy with their efforts more than their wallets.

This is where the obstacle truly lies in getting into China’s markets. The average consumer in China cannot afford a high-end mobile device like the iPhone, which retails for over $800. Cheaper phones are the obvious way to target the Chinese market as its population’s buying power slowly increases. “Industry experts say Apple could develop a cheaper version of iPhone for the big Asian markets,” say Reuters analysts, but the company’s rivals may be beating them to it. While Apple’s share of the smartphone market in China doubled in the last two years, Samsung saw its shares quadruple in the same time period. In addition, Reuters reported that “China’s own Huawei Technologies and ZTE Corp are producing smartphones for less than 2,000 Yuan ($320), half the price of a basic iPhone 4.”

Shoppers on Wangfujing Street in Beijing.

This will be the model for achieving mass-market sales in China so long as the wealth remains so heavily in the coffers of the state. Though the economy is booming, buying power remains low for the time being.

The Coming Shift

In addition to continued growth, the chance exists for a shift in the wealth within China. The Economist reported that for “for China’s rise to continue, the model cannot remain the same”. With an investment- and export-driven economy growing more dramatically than any other in the world in a time when most economies are suffering, a spongy ceiling exists at which the growth will slow unless China looks inward. It cannot expect to continue to sell as buyers dwindle. In addition to continued growth, the chance exists for a shift in the wealth within China. The Economist reported that for “for China’s rise to continue, the model cannot remain the same”. With an investment- and export-driven economy growing more dramatically than any other in the world in a time when most economies are suffering, a spongy ceiling exists at which the growth will slow unless China looks inward. It cannot expect to continue to sell as buyers dwindle.

A wise strategy for China would be to take steps to financially empower its citizens: “To sustain a high growth rate, the economy needs to shift … towards domestic consumption. That transition depends on a fairer division of the spoils of growth.” Stubborn party leaders may wish to maintain their hold on the economy, but in a time of increasing unrest at home, especially with the proliferation of electronic communication, concessions will need to be made. Already the government is using the strategy of disbanding workers’ protests with equal parts tear gas and wage increases. It need only take the initiative a step further and treat its people to a greater portion of the spoils it has acquired internationally. And if a wealthier population will translate into continued expanse on the global stage, China might just give in to the temptation.

Adoption of this strategy could increase the buying power of the Chinese people even more rapidly than the country’s own economy as they begin to catch up to a more accurate representation of the GDP per capita. Much of this would be spent locally, but in the end, greater buying power in the hands of the Chinese people will favor both domestic and foreign markets. One comfortable standing on the sidelines need only watch the iPhones to see how.

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