Future of Chinese economy in hands of consumer culture

David Roche, chairman of investment advisory firm Independent Strategy, believes the future of the Chinese economy lies in the service industry

The official economic reforms undertaken in China in the late 1970s and early 1980s have had an extraordinary impact.

Over the past thirty years, the country's economy has grown to become the second largest in the world.

This growth has been powered, in large part, by the emergence of millions of new businesses.

But for many founders of these new companies, optimism and enthusiasm were tempered by difficulties and pitfalls. There were few role models during that time and it was hard to find the right business model.

The beginnings

David Roche is chairman of Independent Strategy, an investment advisory firm with offices in London and Hong Kong.

A former senior executive at the US investment bank Morgan Stanley, Mr Roche has watched the business scene in China develop over many years.

Deng Xiaoping Deng Xiaoping encouraged enterprise in certain areas of the country

He says it's not surprising that many of the 1980s wave of would-be entrepreneurs found the task of starting companies bewildering - the culture of enterprise in China up until then was muted at best.

"Any form of entrepreneurship was frowned on, yet there was less monolithic industry than in the Soviet Union," he says.

"For example, local authorities were allowed to own their own enterprises. Now that is not exactly entrepreneurship - but they were meant to make a profit and they catered for local needs. So it was a kind of a mish-mash but not individual entrepreneurship."

One of the most visible early signs of the economic liberalisation ushered in by the Chinese leader Deng Xiaoping was the establishment of so-called special economic zones, such as Shenzhen and Zhuhai in the south of the country.

Enterprise in these areas was encouraged, along with the possibility of foreign investment. Migrant labour poured in from the surrounding countryside to work in the new factories.

Initially the focus was on manufacturing and export-led activity. But as economic growth became more firmly established, new opportunities for entrepreneurs began to arise in domestic markets.

In the furniture industry, for example, company founders such as Zhai Meiqing grabbed the chance to build a huge home-furnishing retail chain catering to the needs of an emerging middle-class.

The network of manufacturers that Ms Zhai drew upon to supply her stores, would later provide the inspiration for entrepreneurs such as Ning Li to create new businesses aimed at Western consumers.

New opportunities

Thirty years on from Deng Xiaoping's reforms, the Chinese economy is still growing fast and as prosperity spreads, some business owners see plenty of potential ahead.

Wang Zhongjun, co-founder of entertainment conglomerate Huayi Brothers, is determined to seize the chance to build a ''film-making giant'' off the back of very strong growth in Chinese cinema audience figures. Zhu Guofan, who runs a network of foot-massage establishments, dreams of leading a company with 200,000 employees.

Zhu Guofan Zhu Gofan saw the opportunities in the service industry and set up a chain of massage parlours

Mr Roche says that there's little doubt that a shift in the make-up of the Chinese economy is underway. The days will soon be over when growth can be driven by "exporting widgets and having massive savings rates which go into the manufacturing industry" and businesses catering to the needs of domestic consumers will become more important.

In the future, the biggest opportunities for Chinese entrepreneurs will be in the service sector because that's where the economy has to grow, says Mr Roche. "It cannot grow through exports any more, it's got to grow through the consumer."

"As soon as the consumer gets in the picture you get middle classes. Middle classes are voracious consumers of services. They want to be insured. They want to have nice doctors. They want to have nice dry cleaners."

New risks

But, according to Mr Roche, at the same time as a new emphasis on services may present businesses with new opportunities, there are challenges ahead for the overall economy, because "productivity drives [the] growth rate".

It's easier to obtain efficiency gains in manufacturing and mass production than it is in the processes that enable the delivery of services. He points to the example of the US, where he says the productivity rate of the service sector is substantially lower than that of the manufacturing sector.

Mr Roche adds that as the Chinese economy becomes more dependent on domestic services, the productivity achieved will drop, and therefore so will the growth rate.

"That doesn't mean the people will get poorer but it [does] mean that [China won't] catch up with our living standards at the same speed," he says.

Mr Roche also sees another potential problem ahead, if the "consumer society" in China keeps on expanding. He says that middle-class people want rights.

"They want their houses protected. They don't want people telling them: get out of the way… we want to put a freeway here."

A middle-class society may be a little less easy to control.

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