China’s financial sector used to be famous for its poor service and imperviousness to innovation. Even today, when customers go to make a transaction at one of the country’s big state-run banks, they often take a bag of snacks with them—they know they’re in for a long wait. But things are changing fast in the Middle Kingdom. A new generation of digital finance firms is taking the country—and the global markets—by storm in everything from digital payments and micro-lending to insurance and wealth management. How will China’s lumbering state-run banks react? Will tightening regulation nip this revolution in the bud?
Ioana Kraft began her career in international law, and moved to China 14 years ago. Since 2009, she has been the General Manager of the European Union Chamber of Commerce’s Shanghai chapter, working tirelessly to promote the interests of European businesses operating in eastern China. In this interview, she discusses the challenges and opportunities European businesses face in China.
As the Chinese economy shifts from exports and investment toward domestic consumption, the country is counting on the middle class to drive consumption levels higher. A good reason to be optimistic is that the growing middle class club, with more millennials, is getting more comfortable with borrowing. Yet it is also a worrying phenomenon because the amount of consumer debt keeps climbing. Meanwhile, the red-hot property market has always been a heavy burden on Chinese households and has been getting even heavier in recent years. Will China’s middle class be derailed? Should we worry about the finances of Chinese middle class?
Historians say that paper currency was invented by the Chinese during the Tang Dynasty. Today, their descendants are taking the lead again: Young Chinese are abandoning cash. Shop anywhere in China–from a grand shopping mall to a small street vendor–and you can use your smartphone to pay. Of course, the wide acceptance of smartphones and 4G internet is one thing, the rise of fintech firms like Ant Financial is another. Yet to seriously phase out cash, authorities and professionals are pursuing something more than just QR codes: digital currencies based on blockchain technology. Despite the cracking down on unfavorable operations like ICOs, China is studying blockchain in a rather serious way.
After meeting with Chinese President Xi Jinping this year, Donald Trump backtracked and dropped his accusation of China being a currency manipulator. But the issue of currency manipulation is still debatable. The RMB is certainly not a free-floating currency and the controls are complex. China’s central bank sets the daily rate with movements only allowed in a narrow 2% band. This did not change for years, until August 2015 when the central bank reformed a bit by beginning to set the daily RMB rates based on the closing value of the previous day’s interbank forex market. But it’s not considered a major change and the way to achieve a more open currency remains difficult.
Many people in India still have the impression that Chinese products are cheap and of low quality. Yet India’s smartphone market is 51% Chinese, which may surprise many Indians. And it’s not just smartphones: More Chinese companies, from new tech firms to traditional manufacturers, are heading to China’s southern neighbor, along with many of the largest multinational enterprises. Companies like Ebay, Apple and Uber, have all targeted India as their next growth market. For Chinese companies, though, India market entry might not be easy. They have to face both their old competitors as well as rising local Indian firms.
Foreign Direct Investment has been an incredibly important catalyst for China’s economic development, bringing in the capital, technology and know-how that made China the world’s factory. But China is no longer so fresh and attractive to foreign investors as return on assets is falling. FDI to China increased 3.9% on the year to RMB 731.8 billion in the first 11 months of 2016—the 2015 expansion was 5.6%. Besides, increasing labor costs have become a heavy burden to foreign enterprises, especially manufacturers, who can cut costs by moving to Southeast Asia.
Chinese companies have been on a buying spree around the globe over the past two years. 2016 witnessed a record level of Chinese outbound mergers and acquisitions (M&A) activity, with 932 deals worth over $220 billion taking place, an increase of 246% compared to 2015, according to PwC China. However, the surge in outbound investments has brought concerns from both Chinese authorities and recipient countries; the latter are becoming more cautious regarding the presence of Chinese capital in large-scale deals in key industries. Affected by such concerns and tighter government scrutiny, the number of M&A deals might not be as numerous in 2017 as in 2016, but the trend will not stop.
China’s One Belt, One Road initiative is the fusion of two development schemes—the land-based Silk Road Economic Belt, and the 21st Century Maritime Silk Road. Together they comprise infrastructure between 65 countries containing 63% of the world population, more than 35% of global merchandise trade, and 30% of global GDP. To date about $ 150 billion in investment has been committed.
China’s economic growth over the past few decades has impressed the world. But the world’s second largest economy now faces a difficult transformation: from relying on exports and investments to developing domestic demand. That’s not easy. Government-led stimulus is only a temporary solution and only looked reasonable in the first few years after the recent global financial crisis. In fact, the main problem facing the Chinese economy has been the weak demand in domestic market which manifested clearly in 2006, and became more obvious when growth slowed down.