China’s single market still has great dividend potential in consumer sectors

By Liu Ge Source:Global Times Published: 2019/7/16 18:58:40

Illustration: Luo Xuan/GT

Some people attribute the success of China's reform and opening-up to the "demographic dividend," which is certainly not a comprehensive understanding. It would be a big mistake if we still regard the demographic dividend as a large supply of cheap labor. In my opinion, the broad concept of the demographic dividend should be classified into three levels: The first is the "cheap labor dividend," the second is the "engineer dividend," and the third is the "single market dividend."

The reform and opening-up has taken China to its intermediate stage of industrialization. In the early 1980s, a large number of low-income workers started working in clothing, shoemaking, toy factories and other industrial factories in the coastal areas, becoming part of the global division of labor. At that stage, cheap labor played a decisive role in China's industrial transfer.

After the 1990s, industries like infrastructure construction, real estate, machinery manufacturing and electronics underwent rapid development. The demographic dividend at this stage was mainly an "engineer dividend." China's complete industrial system and higher education system for engineering have produced a large number of engineers, which has become the strongest comparative advantage for China's economic development. This advantage has gradually widened the gap between China and other developing countries in terms of the development model and development level, laying a solid foundation for China to become a high-income country in the future.

In the past decade, the information technology sector represented by e-commerce, social media and travel services has grown rapidly, pushing China to transition toward the advanced stage of industrialization. A large number of new consumer-internet companies have emerged based on innovations in the mobile internet business model. The real foundation of this round of growth is the "single market dividend." China's population of 1.4 billion is equivalent to the combined population of the US, the EU and the ASEAN countries. When the purchasing power of these 1.4 billion people reaches the upper middle-income country level, the single market dividend will show its power.

Compared to the single markets of other countries, China's single market is more unified in terms of currency, monetary policy, taxation system, legal and administrative system, language and information communication. Compared with China, countries like India and Russia adopt a federal system, with big differences between various regions in terms of taxation systems, administrative systems, language, and even culture. As for artificially created common markets such as the EU, while it has established a unified currency, various countries still follow different rules and laws. Besides China, the only major economies in the world that meet the criteria of a population of more than 100 million and medium development levels or beyond are the US and Japan.

The benefits of a single market are apparent. First, there are the cost savings. In a single market, the success a company achieves in one city can be easily replicated throughout the market. It could cost much more if the same business model were to be applied in different markets.

Second, the risks are lower. When entering different markets, business operators need to face risks from different monetary policies and changes of exchange rates. There are also other risks from different market laws, administrative styles, and even tax clearance caused by different markets.

Third, a single market brings development opportunities for more companies. Since China's single market is large, regional differences are also big enough to offer plenty of room for new business. In the US, companies like Amazon can dominate the market. In China, while Alibaba is huge, it still cannot stop the rise of, the transformation of, or the emergence of Pingduoduo and many more.

Uber had a good start in the US but encountered resistance in almost every European country. Because the laws and tax unions of different countries vary, the problems Uber faces in various countries are different. The complicated situation caused a sharp rise in its overall costs, an important reason why Uber later withdrew from some countries. Facebook is now seeking to launch its cryptocurrency, Libra, but Facebook's 2.3 billion users are located in more than 100 countries and regions around the world, mostly outside the European countries and the US. Most of these countries have their own sovereign currency and foreign exchange control policies. By comparison, WeChat Payment's 1 billion users are mostly in China. That's why it will be much more difficult for Facebook to operate mobile electronic payment than WeChat.

For many start-ups, China's single market dividend period is only half way through. In most consumer sectors, the market concentration level is still very low, with the combined market share of the top three still far from the 60 to 70 percent level in most developed countries. Opportunities are everywhere for any newcomers that can seize the right chance to change the original market competition pattern. A single market plus a large number of internet users means there is great potential in many consumer sectors.

The author is a commentator for the CCTV finance channel.


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