Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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China`s Slowdown and Philippine Growth (Part 2)

           Another view that supports that China will not have a hard landing is presented by John Ross, senior fellow at Renmin University of China.   He points out that the hard landings in recent times of the U.S. (after 2007), Japan (after 1990) and Russia (after the introduction of capitalism in 1999) were driven by precipitous declines in investments. These investments were predominantly from the private sector.  In China, the state sector remains the dominant player, despite diverse forms of ownership.  The key role of the State was reaffirmed at the Third Plenum in 2013 and reiterated by Xi Jingping in 2016, while also emphasizing the side-by-side growth of the private sector.  According to Mr. Ross, the state sector can be used by the government to raise investment to prevent a recession, and its dominant role does not arise from it being a majority of the economy.  Rather this ability to manage the business cycle stems from its being large enough to impact investment and therefore GDP growth.  For these reasons, it is highly probable that China will avoid a hard landing in the next five years or so.

          Finally, as the engine of growth slowly shifts from investment to consumption, we should ask what are the spending patterns of the modern Chinese consumer.  This question was answered by a publication from McKinsey&Company by Daniel Zipser et al in an article entitled “Here comes the modern Chinese consumer.”  Chinese consumers are becoming more selective about where they spend their money, shifting from products to services and from mass to premium segments.  They want to pursue a more balanced life in which health, family, and experiences are assigned the highest priority.  Especially notable is the popularity of international travel among Chinese consumers as is their adoption of trends such as mobile payments.  There are also significant differences of consumer behavior by city clusters, of which there are 22.  With a few notable exceptions, such as Huawei’s growing share of the premium smart phone market, Chinese brands have not gained much traction among the premium segments, such as skin care, cars, sports goods, and fashion.  This trend contrasts with the mass segment of the market, in which local brands are winning market share from foreign incumbents by offering a much stronger product proposition.   A curious phenomenon is the Oishi brand which dominates the snack food market.  Liwayway Manufacturing of Carlos Chan has more than ten factories all over China.  Chinese consumers think of Oishi as a Japanese brand (“oishi” is a Japanese word).  It is possible that other consumer products that originated in the Philippines can replicate the success story of Oishi.  Already chocolate-covered dried mangoes are slowly penetrating the premium confectionery market in China.  It is important for Filipino entrepreneurs to be at the forefront of exporting high-value food products to China which will be importing most of its food requirements from abroad. 

          China is already the world’s largest e-commerce market—generating revenues of about $615 billion in 2015, around the same as Europe and the United States combined.  Physical stores, however, still give greater satisfaction to consumers than the online ones, although the gap is narrowing, especially as satisfaction with hypermarkets declines.  Just like in the Philippines, interest in physical stores is reinforced by “retailtainment.”  Two-thirds of Chinese consumers say that shopping is the best way to spend time with family, an increase of 21 percent compared with three years ago.  Malls—which combine shopping, dining, and entertainment experiences which the entire family can enjoy—have benefited most from this trend, at the expense of big-box retail outlets such as department stores and hypermarkets. 

          Travel and tourism are the biggest gainers from Chinese consumer trends.  Family ties are strengthened through travel:  74 percent of consumers say that travel helps them to better connect with the family, and 45 percent of international trips were taken with family in 2015 compared with 39 percent in 2012.  More than 70 million Chinese consumers traveled overseas in 2015, making 1.5 trips on average, and shopping is integral to this experience.  Some 80 percent of consumers have made overseas purchases, and nearly 30 percent actually base their choice of a travel destination on shopping opportunities.  Among international travelers, around half of the watch and handbag purchases are made overseas, while apparel and cosmetics are the most frequently purchased categories.

          How then will all of these macro and micro trends in China impact on Philippine economic growth?  It is very important that the next Administration under President-elect Rodrigo Duterte should exhaust all possibilities of bilateral and multilateral dialogues to attain peaceful relations with China.  There should be less recourse to confrontational and legalistic measures and more to Asian-style face-to-face negotiations.  We have to maximize the opportunities of exporting high-value food products to China, following our initial success with banana exports.   We should diversify our food exports to mangoes and other tropical fruits, coffee, cacao, aquaculture products and other high-value agribusiness products.  We should capture a larger fraction of the more than 100 million Chinese tourists expected yearly in the next five to ten years.  These tourists can be major purchasers of all types of accessories that are produced by cottage industries in the Philippines (handbags, fashion goods, jewelry, etc.).   (To be continued.)