Economy, Talking Point

Looking forward, cautiously

Readership poll points to hopes and fears for China in 2014 and beyond

TP photo w

In the wartime parody Top Secret there is a memorable scene in which the film’s American hero (played by Val Kilmer) joins a group of French resistance fighters escaping from a skirmish with German troops. Using explosives they ambush a jeep full of Wehrmacht troops, which they then use to make good their exit. Indeed, despite flames pouring from its bonnet, the vehicle starts first time and roars off at speed. This prompts a member of the French resistance to quip about its reliability to a comrade: “You’ve got to hand it to the Germans – they make great cars.”

The Chinese seem to agree. Sales there of German cars have boomed and there was further evidence of their stellar reputation in the readership poll WiC conducted last month. When asked which multinationals had enjoyed most success in China, two German carmakers made the top five. One of those auto firms ranked first by a considerable margin.

This was just one of the areas surveyed by our ‘China in 2014 and Beyond’ poll. We also sought out your views on China’s best brand, which local business leader you most admired, the industry sectors you thought would enjoy the strongest growth in the next five years, and your predictions for GDP growth in 2014. We also asked your views on topics that could derail the economy – such as a property bubble, a banking crisis or a military conflict with Japan.

A total of 344 readers took part. Almost 10% resided in the US, 18% in the UK and 14% in Hong Kong. However, the biggest concentration of participants came from mainland China (24%). In total we got responses from almost 40 countries.

The results revealed a curious mixture of bullishness and concern.

Slowing GDP?

It wasn’t so long ago that double-digit GDP growth was the norm in China. But the debate more recently has been about the extent of the slowdown. Not surprisingly our first question was about the growth rate.

We discovered that most respondents believe the world’s second biggest economy is stabilising. Indeed, almost 62% of participants thought GDP would grow this year at more than 7% but at less than 8% – in other words, within a band that would keep things steady. A minority – just under one in 10 – expected a heady return to increases above 8%. Meanwhile those of a more negative view (about 29% of those polled) predicted Chinese GDP would grow at less than 7%. The latter case would suggest a more turbulent economic environment ahead.

Other responses revealed a more positive stance. For example, 64% thought the stock index would go up in the coming 12 months (from a level of 2,237, the closing value of the Shanghai Composite Index on the day of the poll). And when asked about China’s growth prospects over the next five years, 59% described themselves as ‘bullish’ (just under 17%, on the other hand, were bearish). This seemed to pair up closely with a subsequent question about recent economic reforms (see WiC217). Their announcement late last year led 59% of respondents to claim they were more “optimistic” about future GDP growth.

But perhaps the most upbeat piece of data related to consumption. We asked whether Chinese consumer spending would “rise meaningfully each year for the foreseeable future”. And almost 78% thought it would. (Only 11% said no, with the rest unsure.) For businesses selling consumer goods that is welcome news…

We then asked whether China, the Eurozone, India or the US would “grow strongest” over the next five years. And it wasn’t even close: just over 60% voted for China (the US was second with 26% and the Eurozone last, with 6%).

Anything to worry about?

There are concerns. First off, whether China has to deal with a property bubble. In one of the most striking findings of the survey, less than 2% of respondents agreed with this statement: the property market is “healthy and benefits the overall economy”. Most thought the debate was less about whether there is a problem than how damaging it could prove. Almost 37% believed that there is a bubble and that it will hurt the economy. A more sanguine 57% felt that the danger was more limited, agreeing with the statement: “Some cities face a bubble, but not enough to pose a risk for the Chinese economy”.

(If it is a bubble market, our sample doesn’t forecast it will pop this year. Around 65% thought average house prices would rise over the coming 12 months, versus just 13% who predict a fall. The remainder voted that prices will remain flat.)

A similar attitude prevailed towards the financial system. Here a litany of potential problems exists (to name a few: local government defaults, shadow banking risks and a corporate bond meltdown). So it was not a huge surprise that just 8% held a rosy view about the Chinese financial system, while 38% were “worried that a serious bad debt problem might damage the economy”.

But the most prevalent view – as with the property market – was to assess the risk as manageable. For example, 53% voted for the proposition that they were: “Aware there are bad debt risks but confident they won’t damage the economy.” That said, those polled viewed it as a slightly greater concern than a property bust. In a separate question we asked respondents to rank the “chief risks” facing the Chinese economy over the next five years. Among the eight options, a “banking crisis (or a steep rise in bad debts)” came second with 136 votes. The danger posed by a housing bubble ranked third.

So what are the greatest risks?

The most resounding threat that emerged from our poll: an environmental crisis. It was overwhelmingly the top choice, receiving 214 votes as the chief risk facing the economy. Our readers evidently think that environmental degradation – issues such as water shortages and air pollution – is, by some margin, the main threat to the China growth story.

In a separate question we focused specifically on Beijing’s air quality. We asked if readers thought it would improve, worsen or stay the same in the coming five years. The verdict was pretty pessimistic. As most are aware, the pollution is already pretty awful (see WiC178 for an article on last January’s ‘air-mageddon’) but 27% believed it wouldn’t improve and 43% reckoned it will get worse (presumably as more Beijingers buy cars).

Only 30% thought it would get better.

The other big risk is war with Japan. As WiC has reported over the last couple of years, increasing tensions over disputed islands in the East China Sea have seen Sino-Japanese relations sink to their lowest point since 1945. We asked: “Do you think it is possible that China and Japan will experience military conflict in the next decade?” and less than half were confident there would not be a war. A third of respondents actually thought there would be a military conflict, and 22% were unsure.

Only 44.5% rejected the idea completely.

WiC hasn’t polled our readers before. But we have a strong hunch that if we had carried out a similar survey five years ago, the percentage predicting conflict would be closer to 3% than a third.

Indeed, if we’d asked readers about the chief risk five years ago, we predict that the top choice would have been a trade conflict with the US or the EU, rather than a military one with Tokyo.

How times have changed. Out of the eight ‘chief risk’ options we gave participants to choose from, trade war came last.

Where to invest?

Then we asked readers – a demographic that is largely made up of corporate executives and fund managers – which sectors in China they saw as offering the most promising prospects over the next five years.

The bottom three? Getting a mere handful of votes was a sector that WiC has written about extensively: the chronically unprofitable steel industry. Interestingly, property development came in second last (in the past decade it would probably have ranked in the top two). And rounding out the trio to avoid was ‘Old Energy’. This we defined as anything relating to oil, gas and coal.

By comparison ‘New Energy’ was joint second with 100 votes (we defined it as anything derived from wind, solar or other energy alternatives). The environmental theme proved strong again with water management also getting 98 votes. But also polling well was the less environmentally-friendly car industry.

But the two sectors that jointly topped the poll with 151 votes each were E-commerce and Tech, and Healthcare and Pharmaceuticals. Investors are clearly excited about E-Commerce and Tech (see our article on page 10 about Tencent’s stock breaking through the HK$500 level). With China’s ongoing healthcare reform programme – as well as its ageing population – big pharma picked up a lot of votes too.

China’s best brand?

This was one of three questions in our poll in which we allowed participants to nominate the company of their choice. A total of 37 Chinese firms were named but most only got a couple of votes. Indeed, there was a high concentration at the top of the rankings, with most votes aggregated by just seven firms.

This might suggest that the majority of Chinese firms score poorly in awareness terms, especially versus their foreign peers. Some readers were unable to name a single brand, while others opted for unusual candidates (an example: “The Chinese Communist Party. They own it all anyway”).

One of the other more unexpected nominations: “I’m going to go with Flying Pigeon bikes as it is the most-produced vehicle in the history of mankind.”

Interestingly the top five consisted almost entirely of technology-related companies. Internet giant Tencent – which operates the incredibly popular WeChat social networking system – was fifth, while the consumer goods firm Haier (which also has an e-commerce arm) was fourth.

In third place was Huawei, arguably China’s most controversial company. The telecoms equipment leader regularly makes the news in the US and Europe, although often in a less-than-welcome fashion. Its complaint is that it is regularly blocked from winning contracts by foreign governments who see it as a security threat (alleging links to the Chinese military). Huawei management vociferously denies this, and had its own moment of schadenfreude last year when former NSA technician Edward Snowden revealed that US tech giants seemed to be involved in something similar to Washington’s accusations against Huawei. Some of the bad press overseas will have boosted awareness of the brand too, of course. But Huawei is also becoming better known thanks to the release of reasonably priced smartphones in international markets (even if some American consumers still have problems with its name, pronouncing it as ‘Hawaii’).

The runner-up spot as China’s best brand with 62 votes went to Lenovo. This wasn’t a surprise choice, given its dominant local position in the personal computer industry, and its successful push into areas like smartphones, tablets and smart televisions. Lenovo also seems to have given more thought to its international branding than many of its peers. After acquiring IBM’s PC business in 2005, the firm chose a new name that did not sound too Chinese – a deliberate strategy to make its products more appealing to Western consumers.

But the winner of the vote – albeit narrowly – was Alibaba. The internet giant from Hangzhou has become an increasing part of daily life in China thanks to its widely-used online shopping service Taobao (profiled in WiC94). It is now so influential that it has even spawned terms like ‘the Taobao economy’ and ‘Taobao villages’. The success has not been lost on the financial markets, which are eagerly awaiting an IPO (it was delayed last year, see WiC211) and will likely be one of 2014’s biggest debuts.

Which brings us to Alibaba’s charismatic founder, Jack Ma. How a former school teacher could have created such an internet monolith, shaping how a billion people go shopping, is one of the wonders of modern China. Alibaba continues to grow at warp speed. As we reported in WiC182, Ma told shopping mall tycoon Wang Jianlin that e-commerce will “essentially replace” bricks-and-mortar retailing in the coming decade. Rather fortunately, he owns the biggest online shop in China.

Pretty amazing when you consider he set up Alibaba with just $60,000 in 1999…

Although Alibaba won the company category narrowly (with 65 votes), there was nothing slim about Ma’s victory in the individual section (he was named China’s most admired business leader with 68 votes). A further 33 tycoons and chief executives were nominated, but none got enough votes to reach double figures. Ma was the undisputed winner. (Anyone who wants to know more about him should go to our website; our archive contains 48 articles in which he features.)

And finally, back to that German car company…

We also asked participants which non-bank multinational they thought was “doing best in China”. A total of 53 firms were nominated (24 from the US, 21 from the EU, 3 from Japan, one South Korean and just four from other parts of the world).

Within the top five, three were American. The most highly-ranked in this group was Yum Brands, operator of KFC and Pizza Hut, which came in second. It has been so successful in China that sales there have outstripped its home market. Then again, Yum may have missed out on the top spot because it had a tougher year in China in 2013, suffering a revenue slowdown amid food safety fears. Coke (which came fourth) has been in China longer than most, although it was pipped by Apple – a brand that only started taking Chinese consumers seriously a few years ago (see WiC89).

That brings us back to the Germans. In fifth place was BMW, a firm beloved of China’s entrepreneurial class and which has staked out a strong position in the luxury car market.

However, the clear winner of the poll with 52 votes was Volkswagen. Again, this was no great shock since the carmaker has spent decades building up its China business. The story began in 1978 when an uninvited Chinese delegation arrived at the firm’s plant in Wolfsburg, wanting to discuss the potential for cooperation. VW went on to create a joint venture, launching its Santana brand in the Chinese market. Since then it has sold about 18 million cars in China, with Audi, one of VW’s brands, the leader in the luxury vehicle market.

Volkswagen’s Chinese story is told in our Focus issue The Magnificent Seven, which can be downloaded from our website. One secret to its success? Taking a long term view on China. That seems to have helped it score considerably better in our poll than any other multinational.

Our survey was sent out on December 10 by email, with a web link to the questions. Only Week in China subscribers could participate. Our thanks to all those who responded. To see the full results, please download this week’s PDF.

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