A number of media have suggested that the current restructuring in China will come at the cost of faster economic growth. But in reality, we are seeing an acceleration of business results for international companies operating in China.

It therefore seems timely to review what are often referred to “slower growth data” in order to understand their meaning for our businesses.

While it is true that China’s real GDP growth is no longer in the double digits and that it is likely to decrease from 7.8 percent this year to 7.2 percent in 2015, GDP as an economic measure does not fully reflect China’s business potential for foreign companies.

Indeed, what matters to companies doing or intending to do business in China is the amount of GDP the economy will be adding in terms of euros, US dollars or Swiss francs.

One must first look at how much GDP the Chinese economy is projected to add in the future and compare it with past performance. To get a global picture, it is also useful to compare this absolute increase with the amount of GDP growth generated by other countries in their home currency values.

As with every other country, China’s real GDP is reported as the added growth in economic value in the Chinese yuan, minus local inflation. This growth rate makes complete sense inasmuch as it captures the real economic progress that  the country is making with respect to its previous year’s performance.

That said, companies throughout the world report their growth in their local currencies, without deducting inflation from their performance results. They measure a country’s market potential in absolute volumes (millions or billions of dollars) and not in growth percentages. 

To illustrate this, take the case of  Mongolia. With a 2013 real GDP growth rate of 12.5 percent, Mongolia is considered by the International Monetary Fund to be “one of the fastest growing economies of the world.” This growth, however, is based on 2012 GDP of about US$10 billion. Taking inflation (of about 10 percent) and currency devaluation (of about 27 percent) into consideration, Mongolia last year added only slightly more than US$1 billion to its economy. By comparison, the US, which only grew by 1.9 percent in the same year, added approximately US$500 billion to its GDP.

Absolute growth

Ultimately, when managing a company, the absolute growth of a market is the most useful figure in evaluating  how much more business can be generated in the future. From this business point of view, it is striking to note that the Chinese market is actually growing faster than it ever has.

Even though China is projected to grow by only 7.2 percent in 2015, it will likely add more GDP in US dollar terms than it did in each of years 2012-14, when GDP growth was higher. Indeed, should China sustain constant percentage growth rates, its GDP would increase exponentially.

As it stands, however, even with slowing percentage growth, China’s GDP will carry on accelerating, though not exponentially. Ultimately, it is this continuous acceleration in absolute GDP growth that has an impact on businesses potential.

Between 2011 and 2015, China is expected to add more than US$5 trillion to its GDP, compared with US$4.7 trillion in the first decade of the new millennium.  In terms of business opportunities and in US dollar terms, this means that China is growing, on average, twice as fast today as it did in the previous decade.

By adding about US$1 trillion more per year to its GDP, China has by far the greatest business growth potential in the world.

In 2013 alone, business opportunities in China were twice as large as the in the US, which is the second-biggest growth market in absolute terms.

This acceleration in business potential was confirmed by the initial results of a survey that we will be co-releasing in a month or two. It will show that sales,  profits and worldwide shares of sales for foreign companies in China grew faster in 2013 than in 2012 and are generally expected to grow even higher in 2014.

What are implications for businesses can we draw and how can we benefit from these trends?

The first conclusion we reach is that international companies may not be ambitious enough in China. If denominated in US dollar terms, business in China should have grown by 13.4 percent only to keep up with market growth, without gaining any market share. This figure is obtained by taking 7.7 percent growth, plus 2.7 percent inflation, plus 3 percent currency appreciation. By comparison, business in the US would have had to grow by only 3.4 percent, or 1.9 percent plus 1.5 percent inflation to keep up with US market growth.

For those measuring China’s GDP in  euros or Swiss francs, there is a 2-3 percent difference that must be accounted for, which would bring average market growth in China to 11 percent.

In 2014, the minimum rate of business growth necessary to keep up with China’s growing market will stand at approximately 11.3 percent in US dollar terms. This figure takes into account an expected inflation rate of 3.5 percent and a steady US dollar-Chinese yuan exchange rate.

Private sector

Another important point to keep in mind is that the expected growth will come more from the private than the state-owned sector. Indeed, the Chinese government will be providing incentives to the private sector to increase  domestic consumption and raise productivity.

While an increasingly privatized Chinese market with greater domestic consumption will be a welcome development for the world economy, it also means that competition in China will intensify. Local market players will therefore have to become more efficient and resourceful.

In fact, initial results from our survey point to the fact that international companies in China perceive local players as their greatest competitors. This is a marked shift from the past, when they viewed international rivals as their greatest threat.

Harnessing the productive potential of technology will be a crucial step. Indeed, for companies to improve internal efficiency, it will be essential for them to implement greater automation — using more automated machinery to  produce goods or using better software and IT systems to improve business processes.

In the context of such a competitive Chinese environment, being successful will also mean having the right mix of imported and locally developed products, equipment and IT.

China Integrated Co provides services for the set-up, acquisition and development of businesses in China. The opinions are his own.