China is the world’s fastest growing economy, the world’s largest retail and e-commerce market, and the largest exporting nation on Earth. With the world’s largest population to boot, and a middle class with ever-increasing purchasing power, the opportunities for exporters in China are tremendous:
As Chinese economy shifts focus, Canadian firms can capitalize
According to a new report, China’s economy is shifting from resource investment and manufacturing exports to consumer goods and services; Canadian firms in a variety of industries are in a position to take advantage
China imports machinery, oil, chemicals, fertilizers, agri-goods and raw materials. Commodities have been and remain a huge part of Chinese imports, but increasingly, the economy is shifting towards one based on services and consumption. As China matures economically, and the wealth of its people grows, so does the country’s appetite for consumer goods. This presents new and lucrative opportunities for Canadian exporters:
China is Canada’s second largest export partner, and while our top exports come from resource- and commodity-based goods like wood products, oil seeds and mineral fuels, mechanical equipment, consumer goods and the food sector are showing a lot of promise as well.
Regardless of what you’re selling, China is a market of 1.3 billion people, so there is a strong chance that healthy demand for your product exists.
The Asian superpower is the world’s fastest growing market for luxury goods, air passengers and nuclear power, and the largest market for cars, cell phones and seafood.
It has the most internet users and online gamers, the world’s longest high-speed rail network, the world’s busiest port (Shanghai), and over 100 cities with population over one million.
A Sleeping Dragon Awakens
The story of China’s growth is prolific.
From the Communist Revolution in 1949 until the mid-1970s, China was an insular society with a centrally-planned economy strictly controlled by the Socialist state. This all changed when Deng Xiaoping, the successor to the father of Communist China Mao Zedong, instituted radical economic reforms starting in 1978.
The private sector was opened up, entrepreneurship was encouraged, foreign investment was welcomed, price controls lifted, and many state-owned firms were privatized. In turn, the Chinese economy took off, and manufacturing and industry exploded. This former agrarian backwater became the world’s factory, manufacturing and exporting goods across the globe.
The results of Deng Xiaoping’s reforms were astounding:
GDP growth has averaged nearly 10 per cent a year since the start of market reforms in the 70s, the fastest sustained expansion by a major economy in history, and this unprecedented upward climb has lifted more than 800 million people out of poverty. Growth has slowed in recent years, but with a 6.7 per cent growth rate in 2016, it far surpasses the growth rate of its chief economic rival, the United States (1.6 per cent in 2016).
While the privatization reforms of the late 70s, 80s and 90s were dramatic, the Chinese state has over the years maintained a guiding hand in China’s meteoric rise. There are state-owned monopolies across many industries, the government takes an active role in facilitating economic growth and state actors can interfere in the affairs of private firms when it’s deemed necessary to do so.
This mix of free market capitalism and centralized state control, known as State Capitalism, has been pivotal to China’s success, and it’s a model that is being emulated in many parts of the developing world.
China is now reaching a new stage in its economic development. The country is transitioning from an export-based economy to one that revolves around services and consumption. As the Chinese middle class grows and wealth from ever-increasing economic activity reaches new segments of the country’s gargantuan population, demand for consumer goods, particularly foreign goods, is growing rapidly. This is great news for Canadian firms.
The explosive growth of the last several may have slowed, but China is still a nation on the rise. A February 2017 report by PricewaterhouseCoopers states that China surpassed the U.S. in GDP at purchasing power parity in 2016, and it will overtake the U.S. in market rate GDP by 2030. There are other, more optimistic, predictions for when China will overtake the U.S. at the top of the global economic pecking order, but in almost every single case, it’s a matter of when, not if:
The two enormous economies of the U.S. and China have been compared for years, and as China bridges the gap on its rival, it’s important to understand both the similarities and the differences between these two powerhouses.
This graphic from Hong Kong’s South China Morning Post (from September 2015) shows how the titanic economies stack up.
China is not for novice exporters. The market is complex and a lot can go wrong if you are inexperienced. Navigating the complicated relationship between private enterprise and the state is also particularly tricky. If this is your first time exporting, China is probably not for you.
It’s important to understand that the involvement of the Chinese government in the business world is pervasive, and even seemingly private firms can have government involvement in the background.
This video from Dutch professional services firm TMF Group breaks down some of the regulatory challenges foreign businesses face establishing operations in Mainland China:
Here is TMF Group’s China profile from 2015:
Further resources can also be found at the SME Gateway to China section on the TCS website.
Belt and Road Initiative
Learn more about China’s massive multinational infrastructure project, the Belt and Road Initiative, here.
The Canadian government has been engaged in exploratory talks with the Chinese government this year to pursue a free trade agreement. Any possible FTA is still years away, but the implications on Canada’s economy could be seismic. Gaining tariff free access to a middle class market larger than the entire U.S. population would certainly be a game changer.
With that being said, pursuing FTA negotiations and grinding out the specifics of a deal that satisfies the needs of both countries, along with environmental, regulatory, human rights and labour concerns, is no small task. The shape and colour of these negotiations can also change over time, so it’s difficult to assess at this point what an FTA with China might look like, or when it will come to fruition.
Here is Stephen Poloz, governor of the Bank of Canada, speaking about the possibility of a FTA with China:
China has over 50 markets, but according to Export Development Canada (EDC) these are the most popular for Canadian exporters.
Beijing – Tianjin corridor
Pearl River Delta
For information, resources and contacts needed to break into Chinese markets, check out the Canada China Business Council, the China Council for the Promotion of International Trade, and the All-China Federation of Industry and Commerce.
For more detailed information on the dynamics of the Chinese market, check out this EDC Whitepaper.
E-Commerce in China
E-commerce is one of the most effective ways to penetrate the Chinese market. Find out more here.
General Things to Know
To do business in China, you need a strong local presence:
Take a personal interest in your Chinese clients and partners:
When deciding which market to set up shop in or sell into, consider that smaller cities often present faster economic growth rates and less competition:
Protect your intellectual property:
State-owned companies control much of the economy:
China’s most recent five-year economic development plan aims to boost consumerism, providing new opportunities for Canadian consumer goods that did not previously exist in the country. To appeal to the Chinese market, consider the following:
Many of China’s wealthy are looking to invest in Canada, due to limited investment options and stock market volatility at home. Use local trade boards and Chinese chambers of commerce to find potential investments for your projects.
TCS has 11 points of service in China. Make a habit of working with these experts and ask them questions whenever you can. It’s free.
Fraud in China
Fraud is prevalent in China, so you need to be on your toes.
There have been many cases of Chinese firms randomly approaching Canadian firms with offers of substantial contracts. The mystery firm then invites the Canadian company to China, where a host of procedural, business and social event costs are incurred for nothing.
Another common scam involves unsolicited emails from individuals masquerading as Chinese business leaders seeking representatives to establish operations in Canada.
A rundown of other scams you may encounter doing business in China can be found here.
To avoid scams, make use of TCS, EDC, the website KompassChina—which has a list of fraudulent companies and their associated scams—as well as industry associations and other business contacts.
If you have already been scammed, the Canadian government can’t intervene directly, but they can offer guidance to seek a resolution. Consult with consular services right way if you encounter a problem with fraud.
Complaints can also be filed with local Chinese authorities.
Before you agree to any deal, be sure to proceed with caution: perform due diligence and ensure that funds are not advanced and travel expenses are not incurred without legitimate cause. Above all else, consult with a legal professional before you sign anything or send money.
IP Protection in China
China has a relatively poor reputation as far as intellectual property protections are concerned. In a country notorious for counterfeiters and fraudsters, many companies may be nervous about their brand, product, designs or ideas being exposed.
Concerns over IP violations are warranted, as they should be in any market, and you should always be vigilant and well prepared to address these risk. However, China’s dubious IP reputation is somewhat undeserved, as things have improved substantially in recent years.
With China’s transition from a manufacturing-based economy to a consumption-based economy, IP laws and courts have been strengthened to help protect the emerging industries essential to this new Chinese economy, those which produce consumer goods and technology.
As part of TCS’s SME Gateway to China YouTube series, Dr. George Chan, a partner with Simmons & Simmons Beijing Intellectual Property Agency Company Ltd., breaks down what has changed in China over the last decade, and what the IP landscape looks like now:
Chan also provides some useful tips for protecting your IP in China:
Starting a Joint Venture in China
If you are seeking a partner to enter into the Chinese market with, some useful tips can be found here.