As consultants who are closely engaged in many public affairs and government issues, my colleagues at APCO and I have generated 15 “watch-outs” we expect to be important for multinationals navigating China’s business and policy landscapes in 2018. This list accompanies a deeper analysis we just published entitled “Doing Business In The New Era.”
- Beautiful China In 2018, the apparatus of central, provincial, municipal and district government will turn to realizing President Xi’s pledge to build a “beautiful China” with a greater emphasis on sustainable development. In his speech delivered at the 19th Party Congress, Xi set 2035 as a target date for safeguarding the environment. Equally, manufacturers should anticipate more rigorous environmental inspections and tightening standards. Businesses that contribute low-carbon technologies, as well as pollution control, waste disposal and a “circular economy” will be well-placed. Creating a “beautiful China” will not depend on environmental stewardship alone. Xi also called for higher-quality schools, world-class universities, modern hospitals and high-quality health care. Foreign businesses that align their agenda with the “Beautiful China” priorities percolating the bureaucracy will be well-placed over the coming years.
- Financial StabilityCurbing of financial risk and fostering stability will continue to be top goals for government in 2018. The newly launched Financial Stability and Development Committee (FDSC), headed by Ma Kai, will take on the role of policy formulation for exactly this purpose. Aside from managing systemic financial risks, it will also deliver an inter-agency regulatory framework and act as a macro supervision body for monitoring financial activities. To force improvements by domestic incumbents, in 2018 we should start to see regulators crack-open the financial sector, allowing registration of foreign-led joint ventures in certain financial, securities and asset management service sectors (although there will be a three to five-year runway for full implementation).
- Ideological DisciplineTightening control through ideological purity has been a feature of the past five years. This campaign for ideological discipline will intensify in 2018. Official KPIs will be further realigned to support national and party priorities. Party involvement in education, culture and commerce will intensify. And the new China Central Commission for Discipline Inspection super ministry, the National Supervision Commission, will act as an all-powerful arbiter of conduct and political correctness. At the same time, there will be devolution of government powers of oversight and social support to carefully screened industry associations and NGOs, opening interesting new avenues for engagement on policy issues.
- OvercapacityWith their political security assured, Xi and his colleagues look set to focus on quality over quantity in driving economic growth and further accelerating “supply-side reforms” in 2018. This likely means a slow-down in production of raw materials, such as coal and aluminum; reduced investment in non-strategic infrastructure; and heavier government support for value-added industries, such as I.T. and robotics, health care, and new materials—all of which are part of the Made In China 2025 agenda. It also means additional streamlining and consolidation of inefficient SOEs and strategic opening-up of more sectors to private sector competition, and in some cases foreign competition.
- Electric VehiclesIn 2018, China will continue to outperform all other markets in EV technology and deployment. At around 500,000 in 2017, sales of EVs in China already surpass the United States and EU combined, and China produced 43 percent of EVs worldwide in 2016. The government will seek to advance Chinese leadership in the industry in 2018, building on new regulations announced in September 2017 that require automakers to obtain a “new-energy vehicle score” of at least 10 percent beginning in 2019. Additionally, China plans to extend a tax rebate on the purchase of EVs to further incentivize EV adoption. Such policies form part and parcel of a wider effort to dilute the smog that cloaks many of China’s metropolises, while also enabling China to innovate in a key industry of tomorrow. Some analysts forecast China will sell more than a million EVs in 2018, with the industry being led by China’s domestic champions BAIC and BYD.
- Mega CitiesAgainst a backdrop of urban sprawl in China’s premier (and smoggy) metropolises, in 2018 China will pursue increasingly well-coordinated regional development plans and create urban mega city clusters that organize population centers. The most widely touted city clusters include Jing-Jin-Ji, Yangtze River Delta (YRD), Pearl River Delta (PRD), and the grandiose plans for the Xiong’An New Area, all of which provide models for the future of urban technologies and development. This city cluster planning outlines a new vision of China’s approach to urban planning, where urban development is consolidated to focus on economic productivity, minimize commutes, reduce environmental footprints and be more inclusive of China’s migrant workers.
- Artificial IntelligenceMost of today’s biggest firms by market capitalization are in the tech sector. Chinese firms have captured leadership positions, and the country’s emerging strength in all things tech will continue in 2018. The sector is an important driver of Made In China 2025 and the president’s agenda for security and control. Artificial Intelligence is critical to this effort. According to Xi, China’s new sustainable development model moving into 2018 will rely on the “further integration of the internet, big data, and artificial intelligence” with the real economy. This builds on the July issuance of the “Next Generation Artificial Intelligence Development Plan” by the State Council, which sets out an ambitious roadmap for the sector’s development through 2030. Chinese firms such as Baidu, iFlyTek and Tencent are hard at work developing answers to projects like Google’s “DeepMind” AI platform, and are hiring from both the United States’ and China’s growing base of highly-trained engineers. Foreign MNCs in these sectors should anticipate even tighter techno-nationalist competition from domestic titans, which are unencumbered by the privacy concerns that are slowing industry development in the West.
- Sharing EconomyDespite several high-profile bike sharing bankruptcies, China’s sharing economy looks set to continue growing domestically and internationally in 2018. Companies like Tujia—China’s answer to Airbnb—have raised hundreds of millions of dollars in investment funding. And firms like Didi Chuxing, Ofo and Mobike are being warmly received in some international markets. The industry is being fueled by a heady mixture of government support (as offered by Li Keqiang in his 2016 Work Report), widely available payment technologies from WeChat and Alipay, low-barriers to entry, eager venture capital, and hungry consumers. That said, some see a bubble that might burst in 2018, particularly as regulation catches-up with this runaway industry.
- EntertainmentThe 2017 movie “Wolf Warrior 2” became the second highest-grossing film in a single market – over $800 million in China alone—and is emblematic of a blockbuster year for China’s entertainment industry, with movie sales registering 11.6 percent year-on-year growth. In 2018, Western media and content companies will increasingly Sinicize their TV, gaming and movie content as the price of participation in this rich market. At the same time mobile entertainment is booming, with mobile-based gaming revenues in China set to exceed $25 billion in 2017, and livestreaming penetration exceeding that of the United States. Through Internet+ policies, the initial roll-out of 5G mobile technology, continuing dominance by a few players, and the behind-the-scenes direction of the Party, 2018 will see continued entertainment industry growth—but with increasingly Chinese characteristics.
- Energy SecurityUnlike the United States, China is still dependent on foreign sources for its energy – an appetite that is destined to account for 28 percent of global energy demand by 2035. In 2018, government and state-owned enterprises will continue their push to acquire foreign energy assets. A Chinese-led consortium is thought to be the leading contender for a significant stake in Saudi Aramco ahead of its expected 2018 public offering, and President Trump touted a $43 billion investment by Sinopec and CIC in Alaska’s North Shore gas fields. This comes on the heels of a 15 percent Chinese investment in Russia’s Rosneft and an investment in Abu Dhabi’s national oil company. While coal remains the dominant source of energy, China continues to lead the world in development of renewable energy, with hydro, solar and wind energy accounting for roughly 25 percent of China’s energy use.
- Cyber SecurityWith rising scrutiny of social media in the West, in 2018 Beijing will sharpen its confidence and control of the Chinese Internet on the grounds of cyber security. Following the nationwide implementation of the Cyber Security Law in June 2017, both Chinese and foreign firms will continue to go through pains to adapt to China’s new cyber regime—by on-shoring data and servers to China, for instance. Increasingly stringent content restrictions were imposed on Tencent ahead of the 19th Party Congress, and WhatsApp and Skype faced wholescale shutdowns, providing WeChat VoIP platforms an uncontested market for international calls. For its part, Apple has ceded to censorship to maintain its footing in the world’s largest mobile commerce market. However, it remains unclear if compliance and deference alone will do the trick for United States tech companies. Beijing is keen to promote its own domestic champions in the IT field and become a “world-class science and innovation country” in 2018 and beyond. Reinvigorated calls for “cyber sovereignty” at the Wuzhen World Internet Conference just this month are part and parcel of this strategy, and China’s policy rhetoric around “cyber security” provide the strategy’s foundation. Foreign businesses should expect China’s cyber security regime to continue to tighten in 2018.
- Healthy China In 2018, China will push to improve the health and well-being of its nearly 1.4 billion people. Xi first announced this intent in October 2016 when he unveiled the “Healthy China 2030” initiative, the country’s first national-level medium to long-term strategic plan for national health and wellbeing. Agencies across the bureaucracy are aligning around the initiative. The China Food and Drug Administration has proposed changes to current clinical trial requirements which require localized trials regardless of those already administered internationally, and in October 2017, the State Council issued its “Opinions on Deepening Reform of Review and Evaluation Mechanisms to Further Encourage Drug and Medical Device Innovation.” Massive investment is also underway in hospitals, clinics and medical technology. The relatively active reform agenda for health care related sectors suggests foreign companies will face a steadily opening business environment as China strives to improve the health of its people by 2030.
- Belt and Road Initiative2018 will be a pivotal year for the Belt and Road Initiative, as it looks to bounce back from cancellations of projects in Pakistan and Nepal and overcome lingering concerns about its overall financial viability. The initiative’s new inclusion in the Party Constitution secures institutional support and underscores its centrality to myriad government priorities. Chief among these is rebalancing development towards the outer provinces through the roll-out of advanced infrastructure to secure key energy and shipping routes in Central and Southeast Asia. We can expect that the Belt and Road Initiative will remain a central part of Chinese foreign policy as Xi seeks to expand China’s international influence and craft international standards for next generation technologies and infrastructure. The superior soft skills and experience of international MNCs—particularly in local negotiation and stakeholder engagement—will make MNC participation increasingly attractive to the large Chinese SOEs that are able to secure capital for these mega projects.
- Economic GlobalizationDespite the great wave of commentary proclaiming China as the new champion of globalization that emerged following Xi’s speech at Davos in January, many failed to notice the key distinction that separates China’s overtures from more traditional defenses of globalization – the focus on ‘Economic.’ China’s interest is rooted in a pragmatic realization that the continued growth of the domestic economy is reliant upon smooth access to foreign markets, not some conviction in globalization as a way to foster harmony and cultural cohesion between nations. China’s increased willingness to play an active role on the international stage is no doubt part of its attempts to ensure that this access continues and expands in a way that primarily benefits domestic companies. Nevertheless, this cannot be fully achieved without some degree of reciprocity – the Belt and Road’s success is contingent on the perception that its benefits are not unbalanced, and recently announced financial reforms may suggest that the government is aware of the need for equilibrium.
2018 marks the true beginning of China’s much heralded “New Era.” Much of Xi’s 19th Party Congress speech was focused on “realizing the Chinese Dream of national rejuvenation,” which “sees China moving closer to center stage and making contributions to mankind.” This is reflected in the naming of the new China-designed and made highest speed train that now rockets at 350 km/hour between Beijing and Shanghai, and foreshadows a bolder and more assertive China on the global stage—culturally, technologically, militarily and economically. Savvy foreign companies have long touted the “in China; for China” mantra. Moving forward, the emphasis must shift to “In China; By China; For the World.”