The Chinese Economy Should Be Part of Your Growth Plans

The Chinese economy is expected to overtake the United States this year as the world's largest, and while there's been recent widespread discussion about the so-called slowdown of China, the Asian nation is still expected to grow at a rate of seven or eight percent in 2014 compared to a GDP growth rate of barely two percent here in the States. China matters now more than ever for anyone looking to foster business growth. If the country isn't in your business plans by now, then it's time to adjust.

Traditionally, American middle market firms have looked to China as a center of low-cost manufacturing and a means of reducing costs. While that remains true, the Chinese economy is also quickly becoming an important export market for American goods. The US government has been helping middle market businesses export into China: overall US exports to China in 2013 topped $122 billion, a whopping increase of 330 percent compared to 2003. The Chinese population is not only the largest in the world (with some 1.4 billion people), but average income is increasing at a rapid pace, as well. The Chinese market is becoming a better and better place to sell your middle market company's offerings, and it looks like that trend will continue for years to come.

Let's take a look at one middle market firm that is finding success in China. Contrary to what you might assume, it's not operating a low-cost factory to produce cheap goods for sale back to the United States. Instead, Chicago-based middle market firm Grant Thornton LLP is taking advantage of China's growing need for financial and accounting services. As the firm's CEO, Stephen Chipman, told Middle-Market Executive: "There's really a movement away from viewing China as simply a low-cost manufacturing site, and the predominant strategy we see now is American firms looking to deliver goods and services into the China market." While the market for Grant Thornton LLP's services is quite mature here in the US, China is booming with opportunities for the firm's accounting services.

Grant Thornton LLP is now finding growth in China by advising small and midsized Chinese companies on issues of taxation and accounting. Going in alone without a Chinese partner turned out to be a good move, as Chipman explains: "Joint ventures have proved to be a difficult road for many midsize companies — there are challenges in communication, culture expectation, management picking the wrong partner, and a variety of other issues — so the trend in recent years has actually been for midsize companies to establish their own operations. To do that with limited experience in the market, they need a lot of help and the right people on the ground."

Other than the unmistakable fact that China will continue to grow economically over the coming years with a special focus on its booming middle-class and domestic markets, what else do middle market companies need to know about doing business in China? Here are six important trends to keep in mind when making business plans:

1. Urbanization. The Chinese government is continuing its policy of pushing China's population out of rural areas and into the burgeoning cities. This will create a continually increasing need for urban projects centered around transportation, housing, and other public initiatives. Moreover, it will concentrate talent, potential customers, and infrastructure in these booming Chinese cities.
2. Focus on improving wages. The Chinese government is seeking to push up the purchasing power of Chinese workers by boosting the minimum wage and loosening regulations on small, family-owned businesses. These changes, as well as the skyrocketing GDP growth over the last 30 years, mean that China's local economy is quickly becoming the engine of growth for the world economy. As Chinese consumers are able to buy more, companies are able to sell more.
3. A growing middle class. The size and purchasing power of China's middle class are accelerating. This demographic has transformed itself from a cheap source of labor to a group of consumers that can buy the same products as middle-class people do in the Western world. The opportunity in China for middle market exporting is clear, and it's growing.
4. Loosening of state control. The Chinese government has massive influence and control over the economy, but it has been loosening some regulations to allow for more foreign investment and growth in the local economy. The playing field seems to be getting fairer, and it's getting easier to take profits out of China, too. Of course, some level of state control will remain.
5. Anti-corruption campaign. China has a big challenge regarding government corruption, and the new government of Premier Li Keqiang is working aggressively to investigate and prosecute some of the worst offenders, many of whom come from the previous regime. This campaign has been initiated due to public pressure on the ground in China, where people are fed up with the petty and large-scale corruption inherent in doing business and living in China. Whether the long-term culture of corruption will actually change and whether Premier Li will investigate his own supporters are difficult questions to answer.
6. Pollution. Pollution is a major issue in China, with the public becoming more unwilling to put up with urban air that is detrimental to health. The government is talking about protecting the environment, especially because the general populace is demanding it, but whether this ends up being a long-term commitment remains to be seen for the relatively new administration. These environmental pressures may create economic opportunity for American middle market companies working in this segment, however.

China is both a challenging place to do business and a growing realm of opportunity. It will soon be the world's largest economy and is an obvious place to consider exporting your middle market company's offerings. As middle market firms such as Chicago's Grant Thornton LLP find growth in China, where does the country fit in your plans?

What is the biggest risk concerning bringing business into China? Let us know what you think by commenting below.

Boston-based Chuck Leddy is an NCMM contributor and a freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education.