Major shifts impact China

01 February 2012

BEIJING: Urbanisation, wage increases and the rise of "megacities" are transforming China, and causing brand owners to move investment away from manufacturing and towards serving consumers.

According to the Economist Intelligence Unit, the insights provider, China's tertiary sector – activities like advertising, finance and retail – has taken the majority of foreign direct investment (FDI) for each of the last four years.

By contrast, the secondary – or manufacturing – industry took 71% of FDI in 2004, a record high, when the tertiary segment logged a modest 23% share.

As a parallel development, investment in wholesale and retail has grown by nearly 40% a year in the last five years, albeit only reaching a 6% share in 2010, versus 47% for manufacturing and 23% for real estate.

One reason for the wider trend is that wages in China have risen by an average of 12% per year in this period, and expanded from RMB10,000 in 1997 to over RMB35,000 in 2010, meaning China's labour cost advantage has been diminished.

This is "pushing" firms into "higher-end sectors", as shown by the fact that investment rates in textile manufacturing have fallen by 6% a year since 2006, during which time expenditure on specialist purpose equipment has grown by 13% a year.

Urbanisation is also prompting this process, as the proportion of people living in China's cities rises to 60% in 2010, compared with 50% in 2010 and 33% in 2000.

Central provinces such as Hunan, Zhengzhou and Anhui are likely to witness the most rapid growth, from 44% to 55%, making them particularly attractive for marketers.

"Services providers tend to cluster in urban regions – retail chains, for example, perform better in denser areas," the study argued.

When looking at the fastest-growing areas, the Economist Intelligence Unit predicted Chongqing should see investment levels climb by 28.3% to $22.1bn from 2011–15, overtaking Beijing, Tainjin and Shanghai as a result.

These figures stood at 25.7% and $4.2bn for Yunnan. Sichuan will enjoy a 24.1% expansion to $17.7bn, ahead of Henan on $18.1bn, a 23.7% increase, and Anhui on $13.4bn, up 21.8%.

"The long-time dominant provinces of Jiangsu and Guangdong will remain among the top-performing provinces by overall value," the study added."The development of China's new nerve centres, or future megacities, will act as a particularly strong draw."

Data sourced from the Economist Intelligence Unit; additional content by Warc staff