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The Two Faces of the Chinese Economy

Volume 2, 2016

By Professors Zhou Dongsheng, Xu Bin & Juan Antonio Fernandez


Business confidence levels in China are the lowest they have been in the last five years, according to the CEIBS Business in China Survey 2016. Hiding behind this dismal overall picture, however, are two distinctly different stories: a struggling manufacturing sector and a nascent service sector.


The business confidence levels of both Chinese and foreign executives polled last year for the CEIBS Business in China Survey 2016 are the lowest they’ve been in the last five years. However we see a different picture if we look at the Chinese economy in terms of its industrial and service sectors. On one hand, the industrial and material sectors continued to struggle in 2015: on a scale from 0 to 10 (with 10 being the maximum) their executives said they were below 6 when it comes to business confidence. On the other hand, China’s services and consumer goods sectors are on the rise and their executives said their confidence levels were 6.5 or above, with a remarkable 7.0 in the healthcare services subsector. These sharply contrasting “two faces” of business confidence reveal an important characteristic of the current Chinese economy which is undergoing a fundamental transition from its old investment-driven, industrial-centred growth model to one that is consumer-oriented and service-centred.

Service Sector Expected to Expand Further

China’s service sector is expected to grow further in 2016 and beyond, fuelled by investment. When asked about their plans for 2016 in China, 17% of service company executives in our survey said they will pump at least 30% more investment into the sector. In contrast, only 8% of manufacturing company executives said they plan to have such a huge increase in their China investments. The service sector’s tendency to attract more investment is also evident at lower levels of the scale. While 45% of companies in the service sector said they plan to up investments by at least 10% this year, only 33% of those from the manufacturing sector were willing to make that commitment (see Chart 1). So overall, with more investment planned, we expect that China’s service sector will continue its expansion this year.

The service sector will also see fast growth this year as a result of companies’ increasing utilisation of the Internet, which has already played a major role in transforming the country’s business landscape in recent years. Looking ahead, many companies operating in China are planning on further harnessing the Internet’s power to grow their business. However the degree of preparation differs across companies and sectors. Our survey findings suggest that, compared with manufacturing companies, those in the service sector are more proactive in taking advantage of Internet-related opportunities. Compared to 43% of the service sector companies in our survey that were already selling their services/products on the Internet in 2015, the number was only 32% for manufacturing companies (Chart 2). Furthermore, 65% of service sector companies said they plan to make their businesses more digitised; compared to 51% for the manufacturing companies (Chart 3). Overall, given the continued strong growth of Internet use in China in terms of both customer bases and business applications, service sector companies seem to be better positioned to ride the Internet wave and further grow their businesses.

Challenges Ahead

Despite the differences between the manufacturing and service sectors in terms of business confidence levels, planned investment and pace of growth, our survey reveals that all companies in China face the same challenges of rising labour costs and fierce competition. Looking more closely, though, we find that companies in the manufacturing sector are more affected by the slowdown of the Chinese and global economies than those in the service sector (Chart 4). Among those polled, 67% of the executives from the industrial and basic material sectors said the economic slowdown in China is the greatest external challenge to their businesses. Meanwhile only 42% of the executives from the healthcare, technology and telecommunication sectors shared this view. In a similar pattern, 38% of the executives from the industrial and basic material sectors cited the slow global economy as a significant external challenge to their businesses, compared to only 12% of their counterparts from the healthcare, technology and telecommunication sectors.

In addition to these external challenges, companies in China also have to grapple with internal ones, especially in managing human resources and building innovative capability. The country’s transition from an investment-driven economy to a consumer-oriented one poses different sets of internal challenges for companies from different sectors. We found that executives from the consumer goods and services sectors rated innovative and marketing capabilities significantly higher than their counterparts from the industrial and basic material sectors when asked about their internal challenges. Specifically, 46% of the executives in the consumer goods and services sectors considered innovative capability a top internal challenge to their business management, while only 38% of their counterparts from the industrial and material sectors thought so. With regard to marketing capability, the numbers are 43% versus 27%.

In addition, Chart 5 shows that for foreign subsidiaries in China, when it comes to getting support from head office, more executives from the consumer goods and services sectors (21%) considered it a serious challenge, compared to 14% of their counterparts from the industrial and basic material sectors. Chart 5 also shows, understandably, that more executives from the consumer goods and services sectors (25%) viewed distribution problem as a challenge than those from the industrial and basic material sectors (12%).

Thus, despite the fact that business confidence of both Chinese and foreign executives is the lowest it has been in the last five years, we find encouraging evidence of new growth momentum from service sectors and consumer-related industries. In evaluating China’s business environment and formulating future business strategies, companies should not overlook this fundamental and positive transformation of the Chinese economy.


The 2016 CEIBS Business in China Survey was completed by 790 executives between November and December 2015, with 455 from Chinese companies and 335 from foreign companies. Among them were 374 CEOs, GMs, and company owners; 237 Vice Presidents, Deputy General Managers or Directors. The rest represented all the remaining business functions: HR, Finance, Marketing, Sales, Operations and Research & Development. Of the respondents, 80% are from the Chinese mainland, 3% from Taiwan, Hong Kong or Macao, and 17% from foreign countries. Over 90% of them have more than 10 years of work experience, with over half of them having more than 20 years of work experience. This broad and experienced sample added rich and valuable perspectives to the survey.

For a copy of the complete CEIBS Business in China Survey 2016, email pmaria@ceibs.edu.


Zhou Dongsheng is Professor of Marketing at CEIBS, Xu Bin is Professor of Economics and Finance, while Juan Antonio Fernandez is Professor of Management. The authors would like to acknowledge the support of a CEIBS research grant, and excellent research assistance from Maria Puyuelo.