BMO’s Asia CEO on Doing Business in China
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China’s rise as an economic power has been well documented. With its sizable consumer base and evolving economic priorities, new opportunities continue to present themselves to North American companies either actively doing business or looking to do business in the country.
To dig deeper into this topic, Aaron Nelson, a leader on BMO Commercial Bank’s commercial banking team in Northeast Wisconsin, moderated a recent event held by the Northeastern Wisconsin chapter of Financial Executives International. Albert Yu, CEO Asia of BMO Financial Group, served as the featured presenter. Yu provided a “boots on the ground” perspective that goes beyond newspaper headlines or research reports, including the transformations currently taking place in China, noteworthy trends and how North American businesses can navigate the country’s economic and regulatory landscape.
Following is a summary of the event.
Key transformations
China's rise as an economic power began about 40 years ago and it’s still evolving. For companies exploring potential opportunities in China, Yu outlined a few notable observations about the country.
There’s the country’s rapid urbanization for starters. In 1980, about 18% of China’s citizens lived in cities; it’s now 65%.1 While that lags mature economies such as North America, where the urbanization rate is over 80%,2 some estimates predict that an additional 200 million people will move into urban areas in China by 2035. Because the Chinese government has set out strong climate and environmental goals, much of that growth is expected to take place outside megacities like Beijing and Shanghai.
"That means that an extra 200 million people will likely move into what they call a second-tier city—with 5 million to 10 million residents—or a third-tier city, with 2 million to 5 million,” Yu said. “In terms of where you want to bet your chips about where the growth is, I would recommend paying attention to these cities.”
There’s also the fact that China has moved up the manufacturing value chain. It’s evolving from its days as a hub for textile and shoe manufacturing to a focus on technology and innovation in areas such as cars, electronics and medical equipment.
Consumer dynamics
China’s consumer market is vast. But Yu said what's noteworthy is not merely the scale, it's the market’s unique qualities. For one, Chinese seniors are heavy e-commerce consumers.
“A quarter of the population by 2030 will be over age 60,”3 Yu said. “Their consumption will increase 50% in the next eight years, and two-thirds of seniors use e-commerce. The government has a training program to [help] seniors to use electronic gadgets. They are very competent with mobile phones, they go on Alibaba, they order stuff online.”
Meanwhile, China’s younger consumers tend to be spontaneous shoppers, buying products during commutes or in between engagements. Yu pointed out that 50% of consumer loans go to people under age 30. They also tend to be eco-conscious shoppers. Yu said about 80% of Chinese consumers are willing to pay a premium for sustainable alternatives, noting that China is the world’s largest market for electric vehicles, accounting for more than half of the world's total EV sales.4
Finally, much of China’s consumer growth will come from 15 urban clusters, which are expected to account for 90% of China’s GDP growth. “If you want to do business in China, make sure you’re in around one of those 15 areas,” Yu said.
Notable trends
The latest economic direction from the government concerns the transition of the Chinese economy from an export and investment model to one based on internal demand, innovation and self-sufficiency. Part of that involves growing the consumer middle class. It also includes becoming more self-sufficient in areas such as energy production, semiconductor manufacturing and agriculture. “They want to produce for the world, but they also want to produce more for domestic [consumers],” Yu said.
Another major development that Yu believes has been underreported is the growth of the Greater Bay Area, or GBA—a megalopolis surrounding the Pearl River delta. Composed of nine major cities and two special administrative regions, including Hong Kong, Shenzhen, Guangzhou, Dongguan and Macau, the area boasts a population of 86 million people and $1.7 trillion in GDP5—in line with GDPs of Canada and South Korea. Expectations are that the GBA region’s growth will outpace that of the rest of China.
“There’s a lot of talk about they would maintain a 7% growth rate,” Yu said. “If so, by 2035 this area would surpass the U.K. and France as the sixth-largest economy in the world. They are devising strategies to make it happen—relaxing the rules, liberalizing industries, tax accommodations. They’re designing strategies to have the 11 cities complement each other to achieve scale on a global perspective. If I were setting up shop in China today, I would first pick a spot in the GBA.”
Yu also mentioned the importance of the Regional Comprehensive Economic Partnership, a free trade agreement that covers 15 Asia-Pacific countries—including China, Japan, South Korea, New Zealand and Australia—that account for 30% of the world's GDP. Over the next two decades, the agreement is expected to eliminate more than 90% of the tariffs on imports among the participating countries.6
Navigating China’s economic model
The Chinese economy is a mix of state planning and market economic efficiency, though the emphasis often shifts to the state planning side in times of economic distress. With that in mind, companies looking to enter the market need to make sure their business strategies are aligned with the government’s vision. Yu said that means balancing commercial decisions with the country’s social objectives.
“There are a lot of state-owned enterprises here, and commercial decisions are important, but they don't want to go against the social agenda,” he said. "Knowing the differences will help you win the game and seeing things from the other side of the lens will help you to navigate [this environment].”
Yu added that while understanding China’s regulatory environment can be daunting, it could ultimately provide your business with a competitive advantage. "If you haven't done it before, there's a bit of a learning curve,” Yu said. “The positive side is once you cross the hurdle, it's no longer a hurdle for you, but it's a hurdle for your next competitor.”
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Albert Yu
Vice Chair, BMO Asia
Albert Yu is the CEO Asia for BMO Financial Group, a diversified global financial services conglomerate, consisting of the Bank of Montreal and its subsidiaries and…(..)
View Full Profile >China’s rise as an economic power has been well documented. With its sizable consumer base and evolving economic priorities, new opportunities continue to present themselves to North American companies either actively doing business or looking to do business in the country.
To dig deeper into this topic, Aaron Nelson, a leader on BMO Commercial Bank’s commercial banking team in Northeast Wisconsin, moderated a recent event held by the Northeastern Wisconsin chapter of Financial Executives International. Albert Yu, CEO Asia of BMO Financial Group, served as the featured presenter. Yu provided a “boots on the ground” perspective that goes beyond newspaper headlines or research reports, including the transformations currently taking place in China, noteworthy trends and how North American businesses can navigate the country’s economic and regulatory landscape.
Following is a summary of the event.
Key transformations
China's rise as an economic power began about 40 years ago and it’s still evolving. For companies exploring potential opportunities in China, Yu outlined a few notable observations about the country.
There’s the country’s rapid urbanization for starters. In 1980, about 18% of China’s citizens lived in cities; it’s now 65%.1 While that lags mature economies such as North America, where the urbanization rate is over 80%,2 some estimates predict that an additional 200 million people will move into urban areas in China by 2035. Because the Chinese government has set out strong climate and environmental goals, much of that growth is expected to take place outside megacities like Beijing and Shanghai.
"That means that an extra 200 million people will likely move into what they call a second-tier city—with 5 million to 10 million residents—or a third-tier city, with 2 million to 5 million,” Yu said. “In terms of where you want to bet your chips about where the growth is, I would recommend paying attention to these cities.”
There’s also the fact that China has moved up the manufacturing value chain. It’s evolving from its days as a hub for textile and shoe manufacturing to a focus on technology and innovation in areas such as cars, electronics and medical equipment.
Consumer dynamics
China’s consumer market is vast. But Yu said what's noteworthy is not merely the scale, it's the market’s unique qualities. For one, Chinese seniors are heavy e-commerce consumers.
“A quarter of the population by 2030 will be over age 60,”3 Yu said. “Their consumption will increase 50% in the next eight years, and two-thirds of seniors use e-commerce. The government has a training program to [help] seniors to use electronic gadgets. They are very competent with mobile phones, they go on Alibaba, they order stuff online.”
Meanwhile, China’s younger consumers tend to be spontaneous shoppers, buying products during commutes or in between engagements. Yu pointed out that 50% of consumer loans go to people under age 30. They also tend to be eco-conscious shoppers. Yu said about 80% of Chinese consumers are willing to pay a premium for sustainable alternatives, noting that China is the world’s largest market for electric vehicles, accounting for more than half of the world's total EV sales.4
Finally, much of China’s consumer growth will come from 15 urban clusters, which are expected to account for 90% of China’s GDP growth. “If you want to do business in China, make sure you’re in around one of those 15 areas,” Yu said.
Notable trends
The latest economic direction from the government concerns the transition of the Chinese economy from an export and investment model to one based on internal demand, innovation and self-sufficiency. Part of that involves growing the consumer middle class. It also includes becoming more self-sufficient in areas such as energy production, semiconductor manufacturing and agriculture. “They want to produce for the world, but they also want to produce more for domestic [consumers],” Yu said.
Another major development that Yu believes has been underreported is the growth of the Greater Bay Area, or GBA—a megalopolis surrounding the Pearl River delta. Composed of nine major cities and two special administrative regions, including Hong Kong, Shenzhen, Guangzhou, Dongguan and Macau, the area boasts a population of 86 million people and $1.7 trillion in GDP5—in line with GDPs of Canada and South Korea. Expectations are that the GBA region’s growth will outpace that of the rest of China.
“There’s a lot of talk about they would maintain a 7% growth rate,” Yu said. “If so, by 2035 this area would surpass the U.K. and France as the sixth-largest economy in the world. They are devising strategies to make it happen—relaxing the rules, liberalizing industries, tax accommodations. They’re designing strategies to have the 11 cities complement each other to achieve scale on a global perspective. If I were setting up shop in China today, I would first pick a spot in the GBA.”
Yu also mentioned the importance of the Regional Comprehensive Economic Partnership, a free trade agreement that covers 15 Asia-Pacific countries—including China, Japan, South Korea, New Zealand and Australia—that account for 30% of the world's GDP. Over the next two decades, the agreement is expected to eliminate more than 90% of the tariffs on imports among the participating countries.6
Navigating China’s economic model
The Chinese economy is a mix of state planning and market economic efficiency, though the emphasis often shifts to the state planning side in times of economic distress. With that in mind, companies looking to enter the market need to make sure their business strategies are aligned with the government’s vision. Yu said that means balancing commercial decisions with the country’s social objectives.
“There are a lot of state-owned enterprises here, and commercial decisions are important, but they don't want to go against the social agenda,” he said. "Knowing the differences will help you win the game and seeing things from the other side of the lens will help you to navigate [this environment].”
Yu added that while understanding China’s regulatory environment can be daunting, it could ultimately provide your business with a competitive advantage. "If you haven't done it before, there's a bit of a learning curve,” Yu said. “The positive side is once you cross the hurdle, it's no longer a hurdle for you, but it's a hurdle for your next competitor.”
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