Goodbye to the BRICs, Chinese businesses have a new mindset.

Chinese business sentiment has changed….

Chinese business sentiment has converged with the views of business in the USA according to EY’s 11th Capital Confidence Barometer, a twice yearly survey of 1,600 global corporates. Chinese businesses are thinking much more like businesses in developed markets rather than as emerging market players, China is no longer part of the BRICs.

… as a result of economic change at home and abroad…

Economic confidence in the USA has increased over the last year and now 70% of US businesses are confident in local economic prospects. The equivalent figure in China is very similar at 75%, but there is a huge difference to the average confidence level in Brazil, India and Russia (the BRIs) which stands at 43%.

But it is not just on local economic conditions that the USA and China are similar in outlook. While global political instability is seen as the most significant risk by all the 3 groups of businesses, concern over the slowdown in emerging markets was identified by only 16% of Chinese and 9% of American businesses but 29% of respondents in the BRIs identified it as a major risk. By contrast, 18% of Chinese and 15% of American businesses saw the Eurozone crisis as a risk, compared to only 4% of corporates in the BRIs.

China’s economy continues to evolve and the economic condition facing businesses at a macro level are now much more like those experienced in the USA than by the fellow members of the BRICs. China’s economic domain is global and its fortunes are balanced across the globe, with more dependence on developed markets than its fellow BRIC members which remain relatively more exposed to other emerging markets as well as China.

…impacting capital allocation decisions.

Corporate sentiment towards future transactions serves to highlight both the similarities between business leaders in China and the USA, and the differences to their counterparts in other members of the BRICs. 78% of businesses in China and 81% in the USA see their local M&A market improving in the next 12 months compared to 40% of businesses on average across the BRIs.

When asked about capital allocation across geographies this pattern continues to hold. Almost three quarters of Chinese and US businesses expect to increase their investment in developed markets in the next year compared to only 25% of BRI businesses: a huge difference confirming again that business in China has more similarities with developed economy corporates than those operating in emerging markets. For non-BRIC countries, intended investment rates from China and the USA are around double those of businesses from the BRIs, and more than 50% higher for planned investment into the BRICs. China and the USA are very, very similar to one another and very different to the BRIs in respect of capital allocation.

The only significant difference between businesses in China and the USA is that Chinese leaders are even more aggressive in their growth ambitions. 56% of Chinese businesses intend to undertake an acquisition in the next year compared to 33% of US and 30% of BRI businesses. And 60% of Chinese respondents identified growth as their priority for the next 12 months compared to 50% in the USA and 35% in the BRIs. Chinese business is increasingly confident in its own abilities and its prospects and wants to push forward and build a competitive position in developed markets.

 

…so business should plan accordingly.

Chinese businesses are increasingly global in their outlook and have ambitious growth plans. Even though their domestic market is slowing, growth in GDP of around 7% provides a strong platform for developing and implementing medium to long-term strategies, something businesses in other markets often find challenging.

UK businesses should ensure that their approach to dealing with their Chinese counterparts reflects the situation described above. This is now a peer to peer relationship between mature, sophisticated operators. Increasingly we can expect to see a growth in Chinese investment and presence in UK markets and UK businesses need to decide on their future relationship with the new arrivals. Is the best approach to compete head on, to collaborate or some mix of these approaches? Certainly understanding the new players is a critical first step and must go beyond stereotypes to try to understand what is really going on.


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