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China’s New Normal Theory-Innovate, Adapt, Grow!
China’s economy is making a shift towards innovation-driven development amid the economic “new normal” of slower growth.
By: Diamond World News Service
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Apr 30 2015 1:42PM
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Reference: 11422  

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From the fast paced development double digit growth to single digit growth rates of 7 per cent to 8 per cent; Chinese economy is ushering in a new era that would be marked by innovation-led growth and economic restructuring. The era also promises new development opportunities in China for luxury industry. In this month’s Cover Story, Kavita Parab, tried to find how this “new normal” will affect to those doing business in China, especially the diamond industrialists.

Ever since China’s President Xi Jinping referred China’s “new normal” as slower growth during his visit to Henan province in May 2014, the term “new normal” became the new buzzword. China for the last two decades is known for the rapid growth. However, Premier Li Keqiang during annual government work report speech announced that China will, as expected, set its GDP growth target at “around 7 percent.” The new growth target is the lowest since 1990, which analysts looked at as the China’s willingness to accept slower and sustainable growth.

Decoding New Normal
New normal is lower rate of growth. But it also means new models of growth that focus more on consumption, especially domestic consumption and less emphasis on investment. The shift towards consumption and innovation-driven economy requires structural reforms and long-term policies. The newer approach of the China’s economy also means other emerging markets like India will get more opportunities to attract investors and foreign investment inflows (FIIs). Though growth stability is for a scheduled period of time, reforms would need longer time and efforts.

“In the ‘new normal’ chapter of China’s economy, the most important direction of reform and policy orientation is to re-balance the relationship between fairness and efficiency, which is the key to the transition from factor- and investment-driven growth to innovation-driven growth. Efficiency cannot grow sustainably without a level playing field. In the ‘new normal’, industry entry barriers and market monopoly must be eliminated in order for more players to take part in competition in a level playing field,” as pointed out by Prof. JIN Bei, Professor and Editor-in-Chief, China Economist.

China is definitely embracing a “new normal” of slower and sustainable growth, it is the only emerging country who is well under double digits. Hong Kong retailers - one of the biggest markets for jewellery and watches - have shifted strategy to cope with a sharp rise in people taking overseas breaks during the Easter and Ching Ming holidays and expecting fewer Mainland tourists. The tourism business is doing well, especially outbound tours, due to the major depreciation of currencies against HKD, which has made Japan, EU, and Australia appealing to local shoppers.

Challenges
Slower Sales
According to consulting firm Bain & Co's 2014 China Luxury Market Study, which was released in January, China's luxury market has experienced a negative trend for the first time after eight years of consecutive growth. Growth of luxury goods in mainland Chinese was down 1 per cent to 115 billion yuan (US$18.7 billion) in 2014, with watches, men's wear, and luggage and bags being hardest hit, the study showed. The amount of polished diamonds imported into China declined for a fourth consecutive month as reported by the Shanghai Diamond Exchange.

Decreasing power of traditional retail
The rise in online retail sales is gradually weakening the location based retail sales. As reported by National Bureau of Statistics of China, in 2014, the online retail sales reached 2,789.8 billion yuan, an increase of 49.7 per cent compared with last year and the online retail sales of the enterprises (units) above designated size stood at 440.0 billion yuan, up by 56.2 per cent.

Besides, the earlier significance of a specific location based retailing is slowly losing its importance with the emergence of new residential areas. For eg: In Shanghai, commercial distribution has resulted in forming of several centers thus posing a threat to urban commerce.

Opportunities
Shift in Economic Model
Like any other Asian country, China is still a culturally rooted country despite of its capitalistic ambitions. The shift in the economy is expected to bring a number of opportunities for the retailers. Commenting on China’s cultural inclination Pranava Bhargava, Executive Vice President, Shrenuj & Company Limited said, “Chinese consumers, like many of their Asian counterparts, are culturally inclined people. Despite their capitalist pursuits, largely they have not forgotten their roots. Purchase of gold and items of aesthetics are a part of their social behaviour and this factor will come further to fore once the economy moves towards a consumption driven approach from an export driven approach. They have a huge demographic consumer base that can provide them with a large and stable market. This shift in the economic model will bring more prosperity to the local consumers and this will, in turn, drive the demand for lifestyle products such as jewellery. So, I believe that this movement will strengthen the domestic economy and will lead to incremental sales for the jewellery retailers.”

Rise of new sales channels
In the face of change, adaptation to changing market scenarios and changing consumer preferences is crucial for retailers to survive. In order to keep up with the changing market dynamics, the luxury retailers are adapting to local sales channels like daigou (overseas shoppers who buy and send luxury goods to customers in China). Further, some of the luxury brands are increasingly making their presence felt on the China’s social networking sites while some of them are consciously slashing prices in China.

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