Chinese GDP expanded 7.4%

Julian Evans-Pritchard, China economist at Capital Economics Asia Pte ltd, on China retail market

According to a collaborated study by Price water house Coopers and the Economist Intelligence Unit, China is expected to surpass the US as the world’s biggest retail market for the next three years. Chinese retail sector growth will reach 8.6%, 8.0% and 7.9% up to 2018, outpacing the 2.4%, 2.5% and 2.6% US growth. Do you think this scenario is possible despite the Chinese slow economic growth?

We think this is definitely possible to achieve. Economic growth is of course slowing in China, but this is largely due to cooling investment, particularly in the property sector and in heavy industry, rather than weaker consumption. The negative impact of the investment slowdown on the labour market has been largely offset by a shift towards the service sector which is more labour-intensive. Thus, it can create a similar number of jobs with slower levels of growth and investment. In fact, a record number of new urban jobs were created last year and employment alongside with wages have held up remarkably well in recent years, despite the slowdown in economic growth. This has helped support consumption and retail sales, at the same time preventing growth in these areas from slowing as fast as the rest of the economy.

Last year, foreign investment to China overtook the US for the first time in a decade, hitting $128 billion. However, during the same year of 2014, the Chinese GDP expanded 7.4%, the slowest since 1990. How do you compare the nation’s GDP to the West and how this situation is appealing to investors?

China's GDP growth has slowed and, as a result, so has growth in direct investment into China. However, the economy is still growing much faster than the rest of the world and the consumers’ incomes are still rising at near double digit rates annually. As a result, it is not a surprise that even though growth in FDI into China is slowing, it is still growing faster than FDI into the US.

The Chinese government has imposed new regulations on strengthening the cyber security over the US technologies. The regulations involve turning over sensitive intellectual property such as source codes to Chinese authorities. Taking this into account, such standards could limit the trade of US products to Chinese businesses. Since the Chinese market is naturally too big to ignore, what future effect on the retail market of those two countries do you foresee?

The large size of China’s market means it can support its own domestic players with which foreign firms must compete. The tougher regulations you mention will make it harder for foreign firms in politically sensitive areas such as telecommunications to compete, by making it harder for them to invest in China or sell their products to the government and to state firms.

The implication of this is that domestic firms will dominate the market, or at least fare better, in such areas. It is worth mentioning that Chinese firms in these areas can also find it challenging to expand their businesses in the US due to similar security concerns.

More broadly, however, concerns over cyber security should only hamper a small share of the trade and investment between the two countries. As such, I do not think these regulations, unless they become much broader in scope, will significantly set back the development of the retail market in either country.