No reward for sheepishness in the year of the Sheep

Scanning the vibrant Lunar New Year celebrations planned around the globe, in Federation Square in Melbourne or China Town in Birmingham or Hamad International Airport, Qatar, it is obvious the world continues to admire China’s cultural offerings and heritage.

"It is estimated China will still add more to global GDP than the US in real terms in 2015."

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To me, Lunar New Year graphically and colourfully reminds us of the enormous and growing significance this great country will have on the world’s economies. Despite a slower growth rate in China and a lot of press around the improving growth prospects in the US, it is estimated China will still add more to global GDP than the US in real terms in 2015. In other words, China remains a fantastic growth opportunity for both local and global businesses.

This year is the year of the Sheep, indicating a year of harmony and inspiration, which bodes well for businesses operating in or looking to enter this ever-changing marketplace. So to take advantage of the relatively peaceful and motivational environment provided by the Sheep and establish the foundations to deal with more volatile future years, there are three major themes companies doing business in China should focus on in 2015.

1. Digital transformation

Digital transformation is pervasive. At ANZ’s annual meeting in December, our CEO Mike Smith included technology shifts as one of four changes in the global marketplace organisations must embrace.

This is especially true in China where internet users are expected to have reached 700 million in 2014 and the value of online shopping $US450 billion or 11 per cent of total retail sales, surpassing the US where online was about $US300 billion or 6.4 per cent of retail sales.

If we look at one of China’s most successful e-commerce traders Alibaba, the company’s total sales last year on ‘Singles' Day, the world's biggest online retail sales day, reached RMB57.1 billion up 63 per cent compared with 2013. Meanwhile, 43 per cent of their total online transactions were made via mobile devices, up 21 per cent from the previous year, indicating Chinese consumers are increasingly using mobile for online shopping.

As the growing and technically adept middle class continues to evolve, there will be a major surge in demand for electronic payment services. It is therefore critical for businesses to consider their digital strategy and footprint as well as the current and future online behaviors of consumers. This will help them make certain they remain in-sync with the consumer.

2. RMB internationalisation

The internationalisation of RMB will continue to gather momentum. In 2014 the People’s Bank of China (PBoC) signed or renewed 13 bilateral swap-lines with other central banks while clearing banks were appointed in Australia, Europe and Canada. RMB was also increasingly used in trade settlements, cross-border payments and bond issuances in an increasing amount of offshore markets.

Some of these developments were revolutionary and have laid a solid foundation for the Chinese currency to become more globalised. So companies should expect it to become easier and less costly to do business in China. It also allows businesses to avoid the global volatility of the USD market and save on hedging their foreign exchange risk.

3. The consumption boom

China’s private consumption was around $US3.8 trillion in 2014, almost equivalent to Germany’s GDP. However, there remains huge potential for Chinese consumption to grow at an exponential pace when you consider China’s private consumption represents only 37 per cent of its GDP, compared with the world’s average of 60 per cent.

China’s consumption will soon be lifted by several structural reforms including a medical insurance scheme and a minimum pension in the rural sector which will reduce precautionary savings and provide the Chinese consumer with greater spending capacity.

The country’s rising middle class will also help drive consumption growth. During the next few years, we will see an additional 100 million middle-income households enter the market and their spending will make up two-thirds of the total urban consumption, compared with just one-third in 2012.

For business, the changing landscape of China’s consumption equals an array of opportunities.

What businesses should not ignore however is the complexity of this consumer market – there are hundreds if not thousands of different consumer types in China who all expect to be served in a unique, customised way via a multi-channel experience. It is therefore vital for businesses to understand their target market in detail. This requires a range of insights and the know-how to transform them into sales.

It is essential to understand your target consumer in terms of what they desire, what they value and how they make purchasing choices. More importantly consumers should be viewed as constantly changing and businesses need to frequently assess and adapt their strategies to suit. China’s aging consumer, urbanisation, the digital evolution and rising incomes are factors that will create a constantly changing consumer.

When I consider what lies ahead for China, I feel fortunate I have an opportunity to work in this rapidly evolving and globally significant market. Happy Lunar New Year.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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