In the latest McKinsey Quarterly newsletter, Gordon Orr, who has lived in China since setting up the consulting firm’s Chinese offices from 1993, pulls together some recent themes and makes 10 interesting predictions for the year ahead.
Orr, who is the chairman of McKinsey Asia, based in the Shanghai office, predicts (in edited form):
1.Banks underperform. The two main issues are the non-performing loans left behind by the 2009 stimulus package and the volume of wealth management products sold in recent months to retail investors looking for better returns. “The challenge, which many banks are ill-equipped to manage, will be to shift from customer acquisition and growth-at-any-cost strategies to more differentiated ones focused on profits… Complying with decisions of the China Banking Regulatory Commission, for example, must become a more strategic exercise in future.”
2.Pork or chicken prices rise 100 per cent. China’s domestic food supply has been strained for years. Rising demand for protein is pushing the system beyond its limits. Although a better food chain will develop over time, this may take several years.
3.Local protests intensify – and succeed more often. In June 2007 local protesters forced the authorities to withdraw plans to build a chemical plant in Xiamen. Since then a growing number of planned incineration and chemical projects have been withdrawn, postponed or modified following protests. In 2013 local protests against both new construction of polluting facilities and the operation of existing ones are likely to intensify.
4.China spends more on infrastructure. China still lags well behind other nations in the number of airports with paved runways: 452 against 713 in Brazil and 5,194 in the US. Manufacturing investment will be strong this year. Infrastructure spending will continue to drive economic growth and the vast majority of it will be put to good use. Yet the capital efficiency of many projects lags behind that of global leaders.
5.Online competition bankrupts a major main-street retailer. This year will represent a tipping point for growth in the share of online sales of clothes and electronics. Many Chinese physical retailers, as owners of their own real estate and part of broader conglomerates, may be able to hide their underperformance for a while. But further exits from China by multinationals, following the path of Home Depot, Mattel and OBI, seem likely.
6.Even the middle classes hedge their bets. In the past four years the number of Chinese students applying to boarding schools in the UK and US has tripled. Parents are not only motivated by a desire to give their children an alternative to the rote learning that still characterizes much of Chinese education, they are also creating additional options for their children should there be a discontinuity in China. Business owners also have new programs from Australia, Canada and Singapore they can apply for, granting permanent visas for certain levels of investment ($A5 million in Australia).
7.European soccer teams invest in the Chinese Super League. A new leadership intends to privatize Chinese Super League and welcome international investment. Team owners will be able to develop and retain the full range of revenue streams at a modern sports club’s disposal. International teams from many European countries will invest in leading Chinese teams and rotate players between Europe and China.
8.Investment in overseas agriculture is the ‘next big thing’. China has shifted rapidly from a trade balance on agricultural goods to a deficit that’s currently around $US40 billion and growing at 50 per cent a year. China is now the second-largest importer of rice and barley and a top-10 buyer of corn. At a major conference in Beijing in December Chinese private equity firms met with senior executives of US food companies and representatives of US state agricultural bureaus to discuss ways of increasing China’s investment in US agriculture.
9.A third-tier city goes bankrupt. Chinese cities still depend on land sales for a big share of their gross revenue. But supply is not inexhaustible. Without a bailout from the central government, some municipalities will be unable to meet their bills. Continuing to rollover loans to state-owned enterprises just pushes the problem a short way into the future.
10.National holiday weeks are abolished (please). Like many expats living in China, the McKinsey Asia chairman is frustrated at the number of extended national holidays in China. “Perhaps this is a more a hope than an expectation,” he says. One problem is they saturate and overload transport infrastructure. Mandated vacation weeks will either gradually decline into irrelevance or, better still, they will be formally abolished as an idea that has outlived its purpose.