The lure of 1.4 billion buyers

New survey and trade fair signal foreign firms’ confidence in China market


Turkish ice cream at the CIIE

Has life ever been tougher for international firms wanting to do business in China? Travel bans and lengthy quarantines designed to quell Covid infection rates have curbed flows of goods and people. Delay and disruption to supply chains, especially in container shipping, have created bottlenecks for trade flows. Simmering tensions between Beijing and Washington over trade tariffs and technology exports aren’t helping much either.

In this kind of context, companies could be forgiven for pressing pause on their strategies for the Chinese market. But that’s not what they are doing, according to the latest instalment of HSBC’s Navigator report, which was released earlier this week.

The Navigator series offers an inside track into what business decisionmakers around the world are feeling and planning. This year’s ‘Succeeding in China 2021’ chapter asked a representative group of foreign firms for their views on doing business in the Chinese market. Despite the backdrop of gloomy headlines, the outlook from the companies was much more positive.

“Contrary to some media reporting, our findings indicate deepening confidence and further investment in China among international firms,” was the conclusion of the study’s authors.

The survey polled 2,174 companies across 10 major economies in September, suggesting that nearly nine in 10 respondents were anticipating an increase in their sales or exports to China in the next 12 months. Around 87% of the firms in the study expected an improvement in sales in the year ahead, with 63% predicting organic growth of more than a fifth in their revenues.

More than half of the sample said there were plans for M&A activity in China in the same period, with six in 10 respondents expecting to expand their supply chains as well.

Some of that sentiment is buoyed by hopes of better commercial conditions as the pandemic subsides further. But one in three respondents identified the strength of China’s economic prospects as driving their decision to do more business there, alongside similar percentages that cited the scalability of the Chinese marketplace and the efficiency of its supply chains as compelling reasons to invest further.

The Navigator findings came out in the same week as the latest data on Chinese exports, which rose faster than expected in October, increasing over 27% from a year ago.

Imports grew at a slower pace over the period, creating a record trade surplus for the month, despite continuing disruption across the global supply chain.

Sales activity from foreign firms inside China is one of the primary focuses in the Navigator survey. And this year’s study also coincides with the latest iteration of the China International Import Expo (CIIE), which was held in Shanghai from November 5 to 10.

Now in its fourth year, the CIIE is a relative newcomer on the circuit, joining the better-known Canton Fair, which has been running in Guangzhou since 1957 with more of a focus on Chinese exports. The Shanghai-based expo is a different beast in offering a platform for firms to sell their goods into the Chinese market, and its organisers have been keen to send the message that China is open for business this year, with nearly 3,000 foreign companies participating at this year’s gathering.

Covid-related travel restrictions saw much of the action move online, although large numbers of local visitors did come in person.

Coverage of the expo in the local media has been heavy with subtext, with headlines about the increase in floor space for American exhibitors and the loud welcome for newcomers like Amazon, which made its debut in showcasing some of the goods it sells from overseas producers.

Also on display were signs of Beijing’s policy priorities, including a newly designated zone for companies in the integrated circuit (IC) sector, an industry where the government wants local firms to develop homegrown expertise in chipmaking.

Cross-border trading in semiconductors has been complicated by export restrictions on American parts and equipment but most of the leading foreign suppliers were active at the CIIE, with companies like Qualcomm, Intel and ASML displaying their products.

Chinese spending on IC imports topped $350 billion last year, or double the amount it spent on oil, the Global Times added.

Another hotspot was the energy sector, following a crunch in the electricity supply that has hobbled China’s industrial sector for much of the last two months.

The energy shortfalls were set to spark a reaction in deals struck at the expo, a senior official from state asset manager Sasac predicted before the event, with as many as 50 state firms lining up to sign contracts with international vendors. Contracts for oil, natural gas and coal were forecast to increase 22% in value on last year’s expo, he added, while deals for other energy sources such as LNG would double too.

Another of the trends highlighted in the Navigator report is the hundreds of millions of digitally savvy consumers at the forefront of the domestic marketplace. Indeed, there was more sign of the rapidly expanding digital economy at the CIIE, where livestreaming e-commerce was a feature at many of the booths in offering product discounts and answering questions for online viewers.

Li Jiaqi and Viya – two of China’s top livestreamers (see WiC561) – also made an appearance at the expo after being enlisted for special sales sessions with state media outlets to promote imports from a group of 20 countries.

The Navigator study looks at livestreaming in the broader context, with nearly half of the executives in the survey citing the growth in e-commerce and video e-commerce as significant changes in consumer behaviour after the pandemic. While overall spending by Chinese consumers fell 3.9% year-on-year in 2020, online sales grew 14.8% in the same period, the report noted.

International firms that fail to respond to these trends are losing ground commercially and the survey signalled something similar in the surge in digital payments, where total transaction value increased by an impressive 24.5% in 2020.

This advance towards a cashless economy is only going to accelerate as the central bank puts the newly developed digital yuan through its final stages of testing, ahead of a wider launch next year.

Another section of the Navigator research looks at the investment outlook for foreign firms in China. Again the predictions are bullish with 61% of respondents saying they will invest more than a tenth of their operating profits into the Chinese market next year. Many are promising to invest much more than that, including the one in four of the American firms that say they will be dispatching a quarter of operating profits to China, trailing only Mexico and the UAE in similar intention.

These kinds of commitments are underpinned by some of the other findings in the study, especially that China continues to score significantly better than any of its regional rivals as a choice of manufacturing base for foreign investors. “Though recent years have seen a developing perception that manufacturing firms are leaving China in favour of lower-cost markets such as India and Vietnam, we find our respondents to be firmly in favour of China,” the report says.

What also comes through strongly is the momentum around investment priorities like technological innovation, an area where 73% of respondents now believe the Chinese to be more advanced than their home market (this group includes firms from high-tech nations like Germany and the United States, the report notes).

Revelations like these are putting the onus on company executives to invest more in their own capabilities in disciplines like artificial intelligence and the Internet of Things, which are identified as key areas of interest in China.

Sustainability is another major area for investor attention. President Xi Jinping and his colleagues in the Chinese government came in for criticism last week for failing to do more at COP26 to counter climate change (see WiC562). But the massive majority of the firms in the Navigator survey have taken note of China’s commitments to low-carbon transition, with 86% of the businesses seeing Beijing’s carbon reduction pledges as bringing new chances to profit. Companies polled clearly see China as a pacesetter in green technology as well, citing renewable energy (39% of respondents), electric vehicles (38%) and energy-efficient products (35%) as the biggest opportunities.

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