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The potential of growth markets: seizing opportunities in a new global economy The US, Europe and other advanced nations are on a steady economic growth path. Emerging markets are moving at a slightly quicker pace. So what must businesses do if they are to grasp the opportunities that this brings, especially in China, arguably the most dynamic of all? The world economy is in a relatively healthy state. Most advanced economies will register a rise in GDP of around 0.5-2% this year. Although growth in emerging markets has slowed slightly, most of them are still growing faster than developed economies, with China stealing much of the limelight.1 The scale of opportunities for businesses operating in growth markets around the world is therefore expanding. The drivers are financial and economic stability, innovation, rising consumption, labour market growth and more international trade. Standing in the way, though, are some very real hurdles. Businesses often fail to understand new markets. They can adopt over-ambitious or flawed expansion strategies, and their operating models can creak under the strain. They may find it difficult to recruit an educated and trained workforce, be unfamiliar with local regulations and underestimate the strength of competition from domestic and international rivals. And lurking at the back of every business leader’s mind is the fear of the classical boom and bust cycle, which could end in another recession. Such is business. Opportunities are there to be grasped, but the risks have to be considered and mitigated. Global economic outlook “There are good reasons to be cheerful about the global economy,” says Douglas Flint, Chairman of HSBC. “The Fed didn’t taper [the size of its bond-buying programme designed to stimulate the US economy] and the eurozone is forecast to come out of recession in 2014.” “The US has regained its confidence, and despite the government shutdown this autumn our economists are still forecasting the US economy to grow 1.9% this year,” adds Mr Flint. “Chancellor Merkel has been re-elected in Germany aiding economic stability in Europe, and China did not have the hard landing that many commentators in the West feared.” As for the banking industry, Mr Flint refers to a speech given by Mark Carney, Governor of the Bank of England, in October in which he said that it was perfectly acceptable for banking sector assets to grow much bigger than the economies that host them if they are properly regulated. Credit expansion could soon start to happen, and the eurozone’s banking union is beginning to take shape. “Turning to the East, China has clearly regained its footing with expectations of growth rising. Even Asia’s most hardpressed markets of late, including Indonesia and India, have recovered somewhat.” 1 Source: IMF World Economic Outlook, October 2013 China in the ascendancy Few, if any, countries have done a better job than China in mastering growth in recent years. Its development focus has moved towards quality of growth and sustainable growth. At the third plenum meeting of the Chinese Communist Party in November major political and economic reforms were announced in several areas that will keep the momentum going. The reforms should, among other things, revitalise private enterprise, reduce the role of the government in the private sector and rebalance the revenue raising and expenditure of central and local governments. Some measures will involve short-term pain but if implemented they should result in 7-8% annual GDP growth by unleashing further private sector demand for investment and consumption, which in turn will put growth on a more healthy and sustainable path and ripple positively through the region. The renminbi (RMB) has fast become an international currency, and is now the eighth most traded currency in the world. HSBC predicts that by 2015 RMB will become the third largest currency used to settle international trade transactions. The importance of a country-specific business strategy Many multi-national corporations have found fertile ground in China but have only been successful because they have adopted strategies sharply tailored to the market. In doing so, they emulate the practices of large Chinese companies who know their customers well. Take computers and smartphones. Chinese consumers have different preferences from Western consumers. They buy their IT and communications devices differently – instead of going to large stores as many in the West do, the Chinese tend to frequent small, specialised shops. And they are less impressed by famous brands. In addition, urban markets are radically different from rural markets because the income differential between the two is much wider than in advanced countries. Furthermore, strategies that work well in China may also work well in India, Indonesia and other emerging markets. Locating senior executives in China is a must. A Londonheadquartered global advertising company has even gone so far as to place its global chief strategy officer in China to take advantage of the country’s many M&A opportunities that require rapid decision-making. Finding skilled and educated staff can be a challenge, even in the most populous country on earth. As a result, many foreign companies have set up learning academies with local training firms, brought in overseas trainers and developed their own talent. Financing growth HSBC has a China-specific strategy that is linked to its strategic priorities for the rest of the world. “As a financial provider we serve multi-nationals who come to China to do business, as well as support Chinese companies trading and investing overseas,” says Helen Wong, Deputy Chairman, President and Chief Executive Officer, HSBC Bank (China). “Cross-border business is rapidly changing, especially with the rise in the use of the offshore RMB. Trading of the currency has become important in Hong Kong, Singapore, Taiwan and London with discussions also underway for the development of offshore RMB markets in Frankfurt, Luxembourg and Toronto.” China’s outward direct investment continues to increase. Its companies are helping develop Manchester airport in the UK, partnering with the British government to construct a nuclear power station, building highways in Kenya and digging a canal in Nicaragua to connect the Caribbean with the Pacific. Wherever these corporations go, they need banking services. “As a leading international bank HSBC is strongly positioned to help businesses overcome the obstacles they face in foreign trade and investment, because we understand local laws, regulations and culture,” says Ms Wong. “We can’t pretend to know the industry which investors are operating in better than they do, but what we do know and can help them with is to manage their liquidity risks, market risks and currency risks. Big Chinese companies are now setting up overseas treasury centres in the UK and the Netherlands, that’s how sophisticated they have become.” China’s future – how sustainable is it? In recent years some doubts have arisen about the sustainability of the country’s economic model. Labour costs have risen and there are shortages of talent. Other emerging countries are competing in the same overseas markets. There are worries that China’s transition from an export-led economy to a consumer-based one could signal the end of the double-digit GDP growth it has enjoyed in recent decades. However, what cannot be taken away from China is the sheer size, motivation and dynamism of its population. It is a country of nearly 1.4 billion individuals, many of whom aspire to achieve higher living standards. Those aspirations will drive China’s ambitions for decades to come. Even when it becomes a mature market, growing at mature market rates, China’s potential will remain huge. © 2013 HSBC Bank USA, N.A. All rights reserved. Member FDIC. This document is provided by HSBC Bank plc (‘HSBC’). 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