China continues to offer huge market growth potential, has a skilled labor pool and unparalleled infrastructure, and is investing in its capabilities as a manufacturing base for industries of the future. Investing in China is not always easy, but there is no other country that can replace it. Companies that ignore the market risk falling behind their competitors.
Foreign investors in China have faced numerous challenges in recent years. From the trade war with the US to unpredictable crackdowns on the tech and education sectors to pandemic-related disruptions, doing business in China presents unique hurdles not found in many other countries.
Yet despite these challenges, China remains an essential market for many international businesses. China is the world’s second largest economy, is an essential manufacturing and consumption market, and is more and more innovative in its business models.
3 reasons to invest in China
Investing in China is not always easy, but there is no other country that can replace it. Companies that ignore the market risk falling behind their competitors.
Here, we look at three reasons why foreign companies should continue to invest in China in 2022.
1. Market size and growth potential
Although China’s economic growth rate is slowing after years of breakneck expansion, the size of its economy dwarfs almost all others, be they developed or developing. Simply put, foreign companies cannot afford to ignore the world’s second largest economy.
In 2021, China’s GDP grew by 8.1 percent to reach US$18 trillion. With this growth, China’s economy surpassed that of the entire 27-country European Union, which stood at US$15.73 trillion.
Already the world’s second largest national economy, China’s economy is not done growing either.
With a population of 1.4 billion, China’s GDP per capita was US$12,551 in 2021, about six times lower than that of the US. While China is not guaranteed to eventually achieve GDP per capita on par with the US, the gap shows that there is still significant room for economic activity and household wealth to continue to grow before leveling off at a saturation point.
The British Consultancy Centre for Economics and Business Research (CEBR) projects China’s economy to continue growing at 5.7 percent per year through 2025 and then 4.7 percent to 2030, at which point it will surpass the US to become the world’s largest economy. Although these growth rates are slower than in the past, they come from a higher base and reflect China’s transition towards becoming a high-income country.
2. Human resources and infrastructure
China continues to offer a unique and irreplaceable environment for manufacturing, with its vast labor pool, high quality infrastructure, and other advantages. While much has been made of rising labor costs in China, these costs are often offset by factors such as worker productivity, reliable logistics, and ease of in-country sourcing.
For example, in 2020, the average hourly cost for labor in the manufacturing sector was US$6.50 in China, compared to US$4.82 in Mexico and US$2.99 in Vietnam, two popular alternatives for manufacturing. However, while Vietnam’s labor costs in manufacturing are less than half of China’s, Vietnam’s productivity per worker is about one-third of productivity levels in China.
Workers in China’s manufacturing sector tend to be more experienced, more educated, and better resourced than in competing countries, often making China a more cost-efficient option despite slightly higher wages.
The breadth of China’s labor pool means that the country’s human resources are highly adaptable to business needs, as companies will be able to find workers and technical specialists experienced in a wide variety of fields.
Further, China’s labor market is becoming an asset not just for its size and cost efficiency, but for the quality of education. For instance, the Times Higher Education World University Rankings had 10 Chinese universities in its 2022 top 200 list – the most ever – including two in the top 20.
Overall, China was the fourth most represented country in the complete rankings, with 97 universities, behind only the US, Japan, and the UK. The improving quality of China’s universities is reflective of the next generation of Chinese workers that is more educated and competitive than previous ones.
3. Innovation and emerging industries
Once known as an economy rife with copycats and counterfeits, China-based businesses are advancing to the leading edge of innovation and experimental business models.
Companies that do not pay attention to China will not just miss out on the market, but also the country’s increasingly dynamic innovation that is beginning to influence trends worldwide.
China’s spending on research and development is equivalent to about 2.5 percent of GDP, which is far higher than other countries at similar levels of development. This spending has contributed to the growth of dynamic and innovative business models in areas like e-commerce, fintech, and artificial intelligence that are competitive with – or even lead – advanced economies like the US.
One unique advantage for data-fueled innovation in China is the size of its internet-using population. China has close to a billion internet users, which is more than the US and EU combined. About 800 million people in China use mobile payments on a daily basis – over eight times more than the US – leading to a world-leading fintech industry.
China’s tech ambitions are no longer limited to the domestic market either. For example, TikTok, which is owned by the Chinese company Bytedance, now has one billion monthly users, even though the platform is not available in China itself. This makes it the world’s sixth most used social media platform, far ahead of more established platforms like Snapchat (557 million), Pinterest (444 million), and Twitter (436 million).
As the case of TikTok shows, trends that began in China are beginning to influence trends worldwide. Consequently, it is becoming more important to learn from the Chinese market to inform business models and strategies for global audiences.
Beyond opening an enormous market, investing in China positions international companies to gain experience with innovative products that can make them more innovative and competitive in their home countries.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.