Last week, the editor of Insightview.eu visited China. The political situation is described in part I. The main focus was, however, on a rapidly changing eco-system, not least in the retail sector, which is described in part II. Also, the editor had the opportunity to discuss the general economic outlook with Chinese economists, who still see no signs of significantly slower growth, which is elaborated in part III.

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PART I – Political situation

‌In the past, the dynamics of the Chinese economy has often made foreigners lose their breath when visiting the mainland, which has also been reported several times on this website. This was also the case when the editor visited China last week. Today, the ramifications of the “China factor” are so comprehensive that the mainland is increasingly seen by many to be a potential threat to our way of living in Europe and the United States. Lately, this is an assessment, which has been reinforced by President Xi Jinping, whose assertive style has also given rise to worries about China’s ambitions abroad - read also The Economist article, A silk road through ice; China wants to be a polar power. Indeed, Mr Xi’s ambitions appear to be far-reaching, which is, however, in sharp contrast to China’s history. In the last thousand years, China has shown few signs of imperialism. 
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Nevertheless, the above points are valid long-term worries in Europe and the United States, which have also been mentioned on this website in the past - read Insightview.eu’s travel notes from November 2017. This requires that politicians in Brussels, Paris, Berlin and Washington create a better framework for how to interact with China to level the playfield without making Beijing an enemy - read also today's SCMP article, US slaps China's ZTE with 7-year components ban for breaching terms of sanctions settlement. So far, elected policymakers in Europe and the United States have struggled to come up with a convincing answer to the Chinese “threat”, intended to ensure that China does not overrun Europe and the United States. 
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In the same context, the most striking observation during last week’s visit to China was a general acknowledgment among foreigners that any response to an assertive China comes too late (defeatism). Instead, the current slogan seems to be that if you cannot beat the Chinese, it is better to join them. Today, several foreigners, whom the editor met in China, hesitantly stressed that President Xi “maybe” is not such a bad choice. This is another way of saying that they have no other choice than to jump on the bandwagon and continue to prosper from China. The same conclusion appears to have been made by most elected politicians in Europe and the United States, as their economies have become highly dependent on China. 
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This, however, does not change the fact that President Xi Jinping has seen support decline among Chinese from all income groups in society over the last six months. This is, admittedly, only a feeling. Today, it is difficult to make a firm conclusion on public opinion, as China is increasingly turning into a “Big-Brother-is-watching-you” society, which has clearly put a lid on the Chinese people’s willingness to discuss political issues. Nonetheless, the feeling among the Chinese seems to be that Mr Xi Jinping has so far made one major policy-mistake, namely when he made himself a self-styled Emperor. That decision has certainly eroded the popularity of President Xi Jinping among foreigners living in China. Last week, some expatriates even said that they would consider leaving China if, further down the road, the new “Emperor” were to make serious policy mistakes. In the past, such an outcome has usually required a scapegoat (diversion), which often has led to social instability. 
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PART II – A rapidly changing eco-system

‌Beijing promotes digital disruption

‌Having said that, foreign companies and individuals still see significant upside potential from staying on the mainland, as pragmatism always prevails, when it comes to China. This makes sense, as the “old world” has much to gain (and learn) from China. The country has turned into an “leading indicator” of how digital disruption could change Europe and the United States in the coming years. In China, the speed of change has certainly not declined, which became evident when the editor met foreign companies on the mainland last week. The opposite seems to be the case. 
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Indeed, it is highly recommendable for European and US companies (and politicians, in particular) to pay high attention to what is happening in China. Insightview.eu is worried that Europe in particular is not prepared for a tsunami of changes to come from China in the coming decade. Indeed, China could soon become the place where nearly all new standards are created in the manufacturing, retail and service sectors. On the mainland, there appears to be no end in sight when it comes to digital disruption. There are, of course, significant differences in the environment between China on the one side and Europe and the United States on the other. In China, companies benefit from the fact that they have nearly unlimited access to private data on the internet. 
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Last week, the last-mentioned point was evident when the editor met a fintech company specializing in “facilitating” uncollateralized loans to young people, who cannot obtain a loan from Ant (Alibaba’s financial arm – Alipay is part of Ant). The company, which provides loans in the size of RMB 500-3,000, earns a significant monthly interest rate. The company’s non-performing-loans-ratio (NPL) is, however, only 5% to 10%. This is possible due to facial recognition and nearly unlimited access to details about individuals’ social behaviour and economic fundamentals, which has enabled the company to develop an efficient real-time credit-score system.
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In a European perspective, this is, admittedly, creepy technology. This is, however, an essential part of corporate reality in China today – read also the BBC article, Chinese man caught by facial recognition at pop concert. The above is, of course, only possible because internet users’ privacy is not protected in China. On the mainland, policymakers confront the technological development differently than in the United States and Europe. Tech companies in Europe and the United States are exposed to increasing scrutiny from the political system, not least after the data breach of Facebook. Politicians are today on a path of cutting the wings of technology companies such as Facebook, Google, Amazon and Twitter. In the United States, this has been reinforced by the fact that President Trump seems to have a grudge against Amazon. Conversely, Chinese technology companies are free to continue on a path of digitalizing the entire country. There appears to be no limitations on how to use personal data as long as companies make these data available to the Chinese authorities (“Big Brother is watching you”). This has forced Chinese companies such as Tencent, Alibaba, JD.com and Baidu to kowtow to the new Emperor, President Xi Jinping. In China, foreign companies will be forced to follow the same path if they want to stay in the “promised land” – read also the Shanghai Daily article, Ma warns foreign firms to obey rules (December 2017). 
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China’s tech companies own the main entry

‌The above has provided Chinese tech companies with a comparative advantage compared to US and European companies. Chinese companies have been allowed to make use of private data from hundreds of millions of users to improve and develop their infrastructure and IT competence. This has enabled Chinese tech companies to create superior IT domestic platforms, which have turned into the main entry point for businesses and households on the mainland, who want to sell or buy products and services, unless they have unique products such as Apple. Also, this has turned into main entry points for banking, wealth management, public service and other daily routines, not least when it comes to business-to-consumer services. This continues to evolve as the Chinese marketplace rarely allows excessive profits for very long. Competition is tough. Excessive profit will immediately attract more suppliers to enter the market, or Chinese tech companies will see an opportunity to disrupt the sector with new products, services and applications. Indeed, China is a fast-changing eco-system, which requires a high degree of flexibility and innovation. Also, this requires a short time from innovation to product launch - read also today's FT article, Ikea unpacks new model as it adapts to consumer shift. 
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First, the retail and banking sector was disrupted by tech companies (the offline-to-online trend). This was followed by an online-to-offline trend, which started in 2015 when Chinese tech companies began to buy brick-and-mortar. Since then, the latter has gained momentum, not least when it comes to household staples. Lately, fresh food stores, in particular, have become popular on the mainland – click here to see Insightview.eu’s short video from a Hema store (Alibaba) in Shanghai or read the article, Take a tour of a Hema supermarket and experience ‘new retail’. In Beijing, Hema plans to open 30 additional stores in 2018, and JD.com has published an even more aggressive expansion plan.
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Foreign companies in China - Adapt or die!

‌China is the most promising consumer market in the world, but it is also the most difficult due to its dynamics. The speed of change is providing new opportunities. For foreign companies in China, however, this requires a high degree of readiness to adapt and see the world in a new way. On the mainland, the distribution channels are changing rapidly. Also, goods or services, which were “high-end” three years ago, may today have turned into products appealing to the lower middle-income-class because of a steep increase in the general income level of households. This highly dynamic eco-system raises questions for foreign companies in China such as whether it would be wrong to continue to expand in tier-1 cities. Indeed, Chinese households are moving so quickly up the income-ladder that this is changing their taste and consumption composition. What was popular yesterday may turn boring tomorrow. A few years ago, Chinese tourists preferred travelling abroad on group trips; today, 80.2% prefer to make their own travel plans.
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In China, many foreign companies see the speed-of-change as a real threat to their existing business model. They are simply not prepared. Today, several famous foreign brands in the Chinese market risk facing trouble, unless they are willing to accept that the Chinese market should be treated differently. The speed of market change requires a high degree of local autonomy to boost corporate flexibility. The failure to do so could erode their market position. Conversely, a decision to change their global business model could undermine what made these brands popular in Europe and the United States. Indeed, there are no easy choices! If, however, foreign companies find a way to adapt, they could also prove to be in a better position to confront Chinese companies when they come “close to a theatre near you” in Europe and the United States. This is important, as Chinese companies are slowly turning into “market leaders” in several sectors after having been “market followers” for many decades. 
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The upcoming Chinese “invasion” of Europe and the United States

‌Today, Chinese companies are in a much stronger position to conquer the European and US markets than they were a decade ago. They have built a framework, which can also be applied to the “old world”, although there are, of course, significant legal limitations. So far, Chinese companies are only a threat, although several companies have already entered through the backdoor due to millions of Chinese tourists travelling abroad every year - read also the Business Insider article, Danish fintech company Nets teams up with Alipay to launch China’s favorite payment service in the Nordics.
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The editor of Insightview.eu, however, is still surprised that Europe/Scandinavia has not yet been preparing for the upcoming Chinese “invasion”. This could be done by intensifying horizontal and vertical integration between E-commerce and E-banking, which will provide a wider variety of products and services on the same platform. In Europe, in particular, this continues to leave both sectors highly vulnerable when Chinese tech companies, together with companies such as Amazon and Apple, decide to focus more seriously on digital disruption in Europe. So far, Chinese tech companies have focused predominantly on emerging markets where the legal barriers are lower than in the European Union - read also the BBC article, China's Uber has plans to take on the rest of the world. This may soon change, as China’s President Xi Jinping’s One Belt One Road is promoting Chinese expansion abroad. The question is whether Europe is prepared for such a Chinese tsunami? Unfortunately, it is not - Europe is fast asleep! 
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PART III – The economic growth outlook

‌The Chinese economy – No anecdotal evidence of significantly slower growth in 2018 or 2019

‌The editor’s trip to China last week provided no anecdotal evidence of a significant growth slowdown on the mainland, neither in 2018 nor in 2019. Nonetheless, Insightview.eu still predicts growth to slow in 2019, as Beijing is still on a path of reducing the overall debt level - see the global economic growth forecast. Last week, however, there were few worries about the risk of slower growth, according to the people the editor met in China. This optimism may be due to the fact that Chinese, and foreign companies believe that policymakers in Beijing are still willing to raise the level of infrastructure spending to prevent growth from declining abruptly. This was also a view supported by Chinese economists, whom the editor met in China. Among the same economists, the view remains that overall Chinese debt is not yet at an unsustainable level. Also, nominal growth is still running in the range of 7% to 9%, the argument goes, which will put a lid on the total-debt-to-GDP level. Furthermore, Beijing still has plenty of state assets to sell if needed. 
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At present, however, more stimulus measures seem not to be needed, as consumer confidence remains at an elevated level supported by substantial gains in households’ real purchasing power. Having said that, it is worth noticing that young Chinese households have a higher propensity to borrow than previous generations, which has boosted household debt markedly in the last five years. This will, further down the road, make the Chinese economy vulnerable to higher interest rates, although nobody in China seems interested in talking about such an “unlikely” outcome.
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Last week, the trade war between China and the United States was also discussed, but not to the extent as one would probably have expected. The trade war, however, is also seen by some Chinese economists, as an opportunity to push forward economic reforms. Last week, this was a view partly supported by the fact that Beijing launched new measures to deregulate the financial sector. Generally speaking, the feeling on the mainland is that China has the upper hand when it comes China’s economic (and military) competition with the United States. This is also why President Xi Jinping cannot afford to lose face to President Trump, in particular just now, shortly after being proclaimed the new “Emperor” – read also the FT article, US-China rivalry will shape the 21st century.  
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‌13. November 2017 - Unplugged 'Travel Notes': China as a long-term threat rather than an opportunity gains momentum among foreign companies
‌22. May 2017 - Unplugged travel notes from China - Don't shoot the messenger, but optimism prevails!
‌9. November 2015 - Travel notes from China: No turnaround yet in sight; Internet Plus makes significant changes to the economy
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