Friday, January 13, 2017

Is your business ignoring the Chinese consumer?

Chinese businesses may be snapping up US companies in droves, but with huge opportunities in China, far-sighted US companies are looking East.

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The growing trend in recent years has been increased Chinese investment in US businesses, from around US$58 million in 2000 to US$14 billion in 2013. But far-sighted US companies, noting the growth of spending power among China's 1.3bn citizens, continue to expand in the other direction.

While Black Friday delivers record retail sales in the US, the equivalent event in China, Singles' Day, dwarfs it completely.

Originally designed as a celebration for the unattached to celebrate their singlehood in the mid-90s, the annual festival has grown in popularity during the internet era, with millions people across China celebrating their pride through shopping on November 11 (11/11).

Singles' Day is now a 24-hour online sales bonanza promoted by Chinese ecommerce giant Alibaba. It recorded sales of $17.7bn for the 2016 event, a 32 per cent rise over the previous year.1

It is further proof, says Cate Luzio, HSBC's Global Head of International Subsidiary Banking, that "the Chinese consumer wants to buy."

The Chinese consumer wants to buy.

Cate Luzio, Global Head of International Subsidiary Banking, HSBC

Consumption growth

The growing trend in recent years has been increased Chinese investment in US businesses, from around US$58 million in 2000 to US$14 billion in 2013. But far-sighted US companies, noting the growth of spending power among China's 1.3bn citizens, continue to expand in the other direction.

China's consumer demand today rivals China's traditional manufacturing industries as a driver for growth. Consumption contributed 73.4 per cent to China's 6.7 per cent year-on-year GDP growth in the first half of 2016, according to the World Bank.3

Besides eager consumers, China offers a large, youthful workforce and a huge amount of infrastructure development, including the tech hub of the Pearl River Delta.

The astoundingly ambitious new Belt and Road Initiative, designed to connect China to Europe and the Middle East, also offers an opportunity for US businesses to lend their expertise.

Critical decisions

Establishing a Chinese outpost requires careful planning, such as assessing the best city or province to target first. China is studded with relatively obscure but often well-connected cities, which enjoy substantial autonomy and often act as sector hubs with their own business incentives.

Many sectors are still state-dominated and foreign investment is not permitted in areas such as broadcasting and elementary education. As Luzio points out, there is also strong indigenous competition in some sectors.

Despite continuing liberalization of the foreign investment regime, investors must also comply with exchange control and currency regulations. But none of these issues should deter US entrants from taking advantage of the "tremendous opportunity" presented by Chinese consumers, says Luzio.

Partnership route

Many newcomers have traditionally bridged their knowledge gap by teaming up with a Chinese business. "For many, the partnership route is still the way to go – it can be slightly easier for a company that's not yet ready to fully take the plunge," Luzio says. "But it's very important that the two companies share a common thread and that their DNA matches."

Advisers with sound knowledge of the local market can help to identify appropriate business partners, and to clarify the other key decisions facing new arrivals.

"There is a Chinese saying, 'A person crosses the river by feeling his way over the stones'. That's how new investors need to advance in China: having someone help you navigate the market is really important," Luzio says.

"Once companies are ready to move from that joint venture and go to a wholly-owned financial entity, they need the right banking, legal and tax partners to help them structure their business in the right way."

1 Bloomberg - Alibaba posts record Singles' Day sales, November 11 2016
2 CNBC - Why Chinese money is flooding American markets http://www.cnbc.com/2014/09/17/why-chinese-money-is-flooding-american-markets.html
3 World Bank - Reducing Vulnerabilities: East Asia and Pacific Economic Update, October 2016

This article is intended solely for informational purposes. HSBC Bank USA, N.A. assumes no obligation to update or otherwise revise this article. The information, analysis and opinions contained herein constitute our present judgment which is subject to change at any time without notice. Nothing contained herein should be construed as tax, investment, accounting or legal advice. In all cases, you should conduct your own investigation and analysis of each potential transaction, and you should consider the advice of your legal, accounting, tax and other business advisors and such other factors that you consider appropriate. This is not a recommendation, offer, endorsement or solicitation to purchase or sell product or service.

HSBC Bank USA, N.A. 2017. ALL RIGHTS RESERVED. Member FDIC.

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