B2B International
B2B International

May 8, 2012

China, one of the Four Great Ancient Civilisations, with over 5000 years’ history, has tacitly regained its prestige and proficiency, standing as the second biggest economic power in the current world.

Over the past three decades, thanks to the Reform and Opening-up initiated and enacted by Chairman Deng in 1978, China has grown its economy at a significant and stampeding pace (see Figure 1).

Figure 1 China GDP 1978-2011

China is renowned for its incomparable labour cost and unrivalled manufacturing capacity, which easily leads to scales of economy and thus cheaper prices. In addition, China has a controversially high tariff as the entry barrier for importation from other countries. Therefore, a great many people in the world still believe that it is extremely difficult to export goods, particularly those manufactured in the Western world, into China. However, the situation is gradually changing.

From a macro-economic perspective, China has seen its importation having a nominal increase of almost 2.5 times over the past 6 years (see Figure 2). Even after taking into consideration the Chinese currency appreciation of around 28% (see Figure 3), China still managed to double its imports between 2006 and 2012. Therefore, it is not bold to make an assumption that this trend will not change and the peak of China’s imports is yet to come.

Figure 2 China imports 2006 – 2012

Figure 3 Appreciation of Chinese Yuan 2006 – 2012

1) The Expanding Middle Class in Mainland China

Only as far back as 1970, the middle class in mainland China was a stable minority. Once again, thanks to the Reform and Opening-up policies, the middle class emerged and grew steadily in numbers post 1978. According to Euromonitor International, driven by a continued strong economic growth, China’s middle class expanded from 65.5 million in January 2005 to 80 million in January 2007 and is forecast to reach 700 million by 2020 (see Figure 4). According to the Research Report on the National Population Development Strategy, in 2020, China’s population is to reach 1.45 billion. Thus, in ten years, China’s middle class will account for 48 percent of the whole social hierarchy. Needless to say, this group of people are no longer just concerned about having “adequate food and clothing” and, in contrast, would rather pay a bit extra for a better quality of life. Therefore, they represent an unparalleled and growing purchasing power, the likes of which one would never be able to find anywhere in the world.

Figure 4 Number of middle class in mainland China by 2020

2) Inflation and Currency Appreciation Making Western Goods More Affordable

On the one hand, although China has a relatively high inflation rate (especially recently), China’s GDP annual growth rate has been outperforming its annual inflation rate over the past 10 years (see Figure 5). Thus, generally speaking, the purchasing power of people from mainland China has not visibly been affected by inflation. On the other hand, a continuous increase in inflation has resulted in more expensive goods in China than ever before, which can be partly reflected by the rising Consumer Price Index (CPI). From Figure 6 we can see that since 2010, the CPI of Beijing has increased by 26%, whilst London has not seen any significant change, thus closing the gap between these two cities.

Figure 5 Real GDP Growth Rates vs. Inflation Rates

Figure 6 Consumer Price Index Beijing and London

In addition, as mentioned before, the Chinese currency has appreciated by almost 30% over the past ten years, making goods produced in China increasingly more expensive, which, along with the impact from inflation, leads to commodities from Western countries becoming more affordable to Chinese citizens than ever before.

3) The Desire for Goods of Quality and Reliability

Although having a strong prospect for further economic development, China still has some urgent issues to resolve, particularly with regards to ensuring the quality and reliability of its commodities. Take food and medical safety as an example. Recently, the world was shocked to learn about the inferior quality of infant milk powder that was produced and sold in China, which not only caused irreversible damage to the health of many babies but also resulted in several deaths. Recent news of a shocking affair involving the production of medical capsules’ gelatinous coatings from industrial material or more literally, “old shoes and leather”, served to further fuel a common distrust amongst Chinese citizens for the commercial interests of the government’s standards authorities. Such a lack of trust within Chinese society has driven many to have a much stronger aspiration and desire for goods of a higher quality and reliability or, as in many cases, ones that are not made in China.

All in all, we can expect to see an expanding group of customers with a growing purchasing power, amongst whom there would be a rising preference for better quality goods and more reliable commodities, living in an increasingly expensive China, where Western goods are comparably becoming more affordable. Therefore, in the face of such prime commercial opportunities, it seems an obvious question to ask those Western companies who have not yet traded to China – why the wait?

However, doing business in China is far more complicated than what can be imagined. International enterprises must take various aspects into account, such as tackling the legal issues, sourcing suppliers, distributors and partners, all of which would be clearer with the assistance from a professional research and consulting firm. B2B International, as an experienced research and consulting agency with an established operation in China, would like to support companies willing to grasp this “Golden Time for Exporting to China”. To find out more about how we may be able to help, please visit www.b2binternational.com/china