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A year of critical and fundamental change for China

Updated: 2015-01-13 11:19
By GORDON ORR (China Daily)

Investment

With fewer attractive investment options in China, the opportunity to invest in Hong Kong-listed companies through the Shanghai-Hong Kong Stock Connect program will look more attractive in 2015. Currently, a lack of awareness about the available stocks and a high minimum investment are holding people back, and the fund flows are way below daily limits. In 2015, that will change.

The result of all this is that drivers of economic growth will be harder to find in 2015.

Increasing consumption has accounted for more than 50 percent of GDP growth for the past couple of years. Its share, for reasons laid out above, will likely be smaller. Infrastructure investment is directly under government control and will likely remain at current levels and contribute to growth as it did last year.

However, property investment-historically the driver of about 15 percent of GDP-will probably have another weak year. Residential supply has exceeded demand in many cities, and investor interest has diminished as prices have stagnated.

Could growth be driven by exports? Not since 2007 have net exports contributed more than one percentage point to China's growth. Recovery in the United States has not led to a growth in net exports, and a big boost from demand in Europe in 2015 seems unlikely, even with lower oil prices.

Innovation

Does China innovate? Now, we will finally stop asking that question and focus on the global impact of the innovation that is clearly taking place. The number of Silicon Valley-based investors visiting China to learn from Internet-enabled business is remarkable. These people do not waste their time.

Beyond the Internet, hundreds of medium-sized companies in the Chinese industrial sector are creating their own version of the German Mittelstand, providing ever-more-serious competition to Fortune 1,000 competitors. No longer focused simply on cheap, they deliver great value, listen to what customers want and develop products in response.

On a very recent visit to India, I noticed a tipping point. No longer were there complaints about the low quality of Chinese industrial goods; instead, there were compliments about their remarkably high quality. Biotech, pharmaceutical, consumer electronics, medical tech, drones, graphene and telecommunications equipment are just some of the sectors where aggressive Chinese medium-sized companies lead the way in their field, often privately owned by a founding chairman or chief executive officer who has a true passion to become a global leader.

Rule of law

A comment you will hear less in 2015: "I can do this-it is China."

Businesses will more fully recognize that anti-corruption initiatives and rule of law with Chinese characteristics are long-term foundational elements of this leadership's platform-they are not optional, and they are not going away. Companies will need to become clear about how recent statements-such as President Xi Jinping declaring that the objective of advancing the rule of law is conducive not only to updating State governance but also to deepening reform-apply to them.

We will see the government standardize more of its approaches to decision-making on business and regulatory issues, using the precedent of cases heard. For example, reviews of acquisitions should be faster, with clearer conclusions.

The author is a director in McKinsey's Shanghai office.

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