Public policy research covering geopolitics and international relations, urban and social development, industrial issues, and macro-economy.
2020 was a tough year for the world due to the COVID-19 pandemic. As the world fell to recession and chaos at the end of the year, China maintained a rare level of stability and peace. Economy wise, China’s annual economic growth is expected to reach around 2%. Nevertheless, this achievement is still impressive as the pandemic has dealt a heavy blow to the global economy and society in 2020, and only a handful of economies can achieve positive growth.
As the global pandemic continues to spread, uncertainties and destabilizing factors still exist in the world economy. Since the Chinese economy has been deeply integrated into globalization, the view that the Chinese economy is immune to the effect of COVID-19 does not hold and will not be supported by long-term reality. It should be noted that this year’s positive growth has been achieved with tremendous efforts from all sides. Both the strong support and stimulus from the government and the standstill of other countries have indirectly benefited China as the world’s factory. However, none of these factors are sustainable, and China’s future economic development will still be affected by structural problems in its domestic economy.
As researchers at ANBOUND have long pointed out, the underlying problems of China’s economy lie in the issues that have been existing before the pandemic. Even if the pandemic recedes and economic activity returns to the normal level, a variety of structural problems inherent in China’s domestic economy will continue to emerge, which will inevitably drag down the extent and quality of economic recovery. Therefore, the current optimism of China in comparison with other countries cannot conceal such problems that it actually faces.
In the long run, China’s macroeconomic outlook will shift from rapid growth in the past 40 years to high-quality development in the next 30 years, while in the short run, as China embarks on its 14th Five-Year Plan against this backdrop, the basic development environment it faces should be a period of economic contraction, which is completely different from the rapid development in the past period of economic expansion.
For Chinese enterprises, such a change of macro environment is the key to whether they can perform well or even just to survive, which is also related to the cyclical nature of enterprises. Chan Kung, founder of ANBOUND, has pointed out that it is important to pay attention to the cyclical nature of an enterprise and distinguish between the “development cycle” and the “survival cycle”. He also emphasized that if enterprises seek to grow in the “survival cycle”, nine times out of ten they will make mistakes. In the “survival cycle”, enterprises should focus on how to prevent assets from depreciating, how to reduce costs, and how to prevent products from being obsolete.
Wang Jianlin, chairman of Wanda Group, acknowledged in his speech in October that it’s not easy for most Chinese companies to make money in this new era. “Private enterprises, especially some small- and medium-sized private enterprises, should avoid focusing too much on unattainable ideals. Instead, they need to return to the core of their business, focus on costs and cash flow, and ensure their own survival.” Different strategies should be adopted for different economic cycles. Enterprises in the economic contraction cycle are facing the “survival cycle”, and hence they should focus on the essence of the main business to ensure their continuity. Zhang Jindong, chairman of Suning Holdings Group, recently suggested that the development direction of enterprises in the new era is clearer, that is to focus on high quality and actual development. Zhang added that Suning will focus more on its main retail business and optimize its business in the next decade.
The statements of Zhang Jindong and other entrepreneurs are representative in the Chinese market. Although their judgment of the situation is somewhat late, it is still not too late for them to adjust their corporate strategies. Chinese entrepreneurs must realize that China’s economy is now in a period of contraction, and coupled with the unfavorable market environment at home and abroad, their corporate strategies do need adjustment, and it is now the time to think about “surviving the winter”. As costs rise, the era of economies of scale is over, and business expansion should be pursued with caution. In a period of economic contraction, it is even more important to make risk controllability the preferred target, and shift business outward expansion to the inward exploration of potential, focusing on better business management and technology enhancement.
Of course, under the current situation, there are some enterprises in the country that are “bottom-fishing” and to seek the expansion of business, but it should be noted that this is basically confined to the state-owned enterprises (SOEs). On the one hand, the pandemic has in fact seen a further concentration of resources in favor of SOEs and a further strengthening of their position in the domestic market of China. On the other hand, with the convenience of social capital redistribution, the trend towards capitalization of SOEs has become apparent in recent years, and many SOEs even turn their focus to “capital speculation” instead of their main business. This kind of counter-trend expansion of the state-owned economy has both foundation and momentum. Under the attraction of high-quality resources, administrative leading factors may also be playing a role.
For enterprises with more market-oriented characteristics, the above-mentioned behaviors are not exemplary and the objective situation does not allow them to do so. During the economic contraction cycle, enterprises should adhere to the strategy, recognize their capabilities, stop expansion, and aim for survival.
Under the strategy adjustment, it is inevitable to reduce capital expenditure. Enterprises that may have been excessively diversified will also face the pressure of increasing the disposal of non-core assets. As Zhang Jindong said, “it is time to sell and merge.” The meaning of the “survival cycle” of an enterprise is that it can only seek long-term development by surviving.
Founder of Anbound Think Tank in 1993, Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.
Lantao Li, graduated from Beijing Normal University in 2013 with a PhD degree of Natural Resources and Harbin Institute of Technology with a bachelor degree of Transportation, is an assistant researcher in macroeconomics at Anbound Consulting which is an independent think tank headquartered in Beijing.