China’s Economic Slowdown and What it Means for Aussie Retailers

By Ray Huang | 13 Jan 2016

Recent economic turmoil in China has left many Australian retailers reconsidering plans to sell into the Chinese market. But experts are preaching caution not panic.

The massive slowdown in China’s economy has been much discussed in the past few weeks. China’s stock market has plummeted since the New Year, driven by some pretty significant factors including a rapidly ageing population, a labour shortage and reduced demand from other emerging market economies.

China’s circuit-breaker shutdown of its A-share market last week was meant to limit panic selling. However, some analysts have speculated that it actually increased panic selling, with the Chinese Government axing the circuit-breaker system Thursday night.

Aside from stock market volatility, other concerns include the Chinese Government’s uncertain reform plans and the questionable stability of the yuan.

So what does all this mean to Australian retailers currently selling into or looking to enter the Chinese market?

Opportunity still abounds

Although the Chinese economy has experienced some bumps recently, most Chinese middle-class consumers are still optimistic about the future and are looking to spend more online.

Furthermore, Chinese consumers have been upgrading their shopping behaviour, with quality and brand becoming more important than price. This has spurred Chinese customers to buy more Western products from overseas, due to the higher perceived quality of these products. The slowing of the Chinese economy is not expected to drastically alter this consumer behaviour.

According to a report issued by McKinsey & Company, China’s economic dip is moving shoppers online. McKinsey surveyed 1,200 Chinese consumers to learn more about how their purchasing decisions might be affected by recent economic events. The results indicate a more upbeat picture than most expected. Chinese consumers are largely optimistic about the economy and its future direction. Some groups remain as enthusiastic as ever, while others plan to make adjustments in their spending habits, with a decided turn toward shopping more online.

Among those survey respondents, 71 percent still expect income to grow, although at a much slower rate than three years ago; and 84 percent expect to spend more. This finding corresponds with recent boom in the Chinese online shopping market, especially the overseas online shopping market. The total volume of China’s overseas online shopping market has reached 240 billion yuan ($52 billion) in 2015, registering year-on-year growth of 60 percent.

Wages are still increasing and many consumers are holding tight to their middle-class aspirations. Some may cut their spending, but the consumption upgrade is expected to continue. The move from in-store to online purchasing is set to accelerate.

Australian retailers are advised to take this opportunity to sell or continue selling to China via cross-border e-commerce. It’s quick to launch your business and easy to withdraw, and heavy investment and business risks can be avoided.

Be more cautious

As China’s economy weakens, many foreign companies have started to worry about the future of their business in China. While it’s wise to be cautious, it doesn’t mean the window of opportunity has closed for Australian retailers. For retailers who have already established operations in the Chinese market or have decided to move in, it’s important to examine strategies to adapt to the ‘new normal’ of the Chinese economic environment.

The Chinese market is projected to remain volatile in the near future and Australian retailers would do well to avoid making heavy investments in Chinese market. E-commerce represents the most cost-effective, flexible and safest strategy for operating in the Chinese market, especially during time of economic uncertainty.

The slowdown in the Chinese economy does not mean that Australian retailers should pull out of the market; it just means that it’s time to be cautious. Here are some tips to help solidify your e-commerce business during this volatile period:

  • Do not establish a new business entity in China.
  • If you are already operating in the Chinese market, curb your operational spending.
  • Watch out for fixed costs and beware of taking on debt.
  • Outsource as much local operational work as possible to third-party service providers.
  • Look for third-party service providers that charge fees based on the results of their work, rather than up front.
  • Many retail agents or platforms charge deposit and advance fee. Try to only pay them when you are sure about your business growth in China.

The safest approach to selling to the Chinese market is to employ cross-border e-commerce, rather than trading in bulk export. Under cross-border e-commerce, no local entity or certifications are needed. Many Australian retailers, such as Pharmacy Online, have benefited and are continuing to benefit from cross-border e-commerce to China.

 

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