It is vital that the country’s companies continue to upgrade their operations in the next five years as part of the “Made in China 2025” drive. Partnerships with overseas players in advanced technology will increase China’s competitive edge, according to Andy Cheung, managing partner with Ernst & Young in Greater China.

“The country has done an excellent job, but timing is crucial if China is not to lose its edge,” he said, adding that manufacturing rivals in countries such as Indonesia and Vietnam are improving their infrastructure and labor skills.

To do this, Cheung has called for greater international collaboration when it comes to technology and other key services. This will help increase momentum as the nation pursues the “Made in China 2025” strategy, which centers on technological development in a move to revamp the manufacturing sector in the next 10 years.

Since the second half of last year, the economy has continued to slow. GDP growth fell to 7 percent in the first six months of 2015 from 7.4 percent last year.

“We need to adapt to the changing business environment as China’s reforms deepen, and focus on client needs, such as IT consulting, e-commerce and outbound mergers and acquisitions,” Cheung said.

Industries including retail, life science, medical, technologies and transportation still have excellent growth potential. But energy-consuming industries such as the automotive sector, mining and chemical production are facing tough times. In these areas, talent and resources need to be redeployed as the economy is rebalanced.

“When you look at the figures, 7 percent growth is still impressive compared with many other countries, and is more sustainable as the economy is transformed,” Cheung said.

“As reform continues and capital markets mature, there will be more demand for professional services.”

Ernst & Young is reaping the rewards from this. The global company is on track to record double-digit growth this year in China and plans to expand its latest recruitment by 300 to 2,100.

The firm opened new offices in Shenyang in Liaoning province, Changsha in Hunan province and Xi’an in Shaanxi province during the past two years.

“Many of the ongoing reforms and government initiatives, such as State-owned enterprises, the Belt and Road Initiative and outbound investments have presented business services opportunities to professional firms like Ernst & Young,” Cheung said.

Andy Cheung, managing partner with Ernst & Young in Greater China

We sat down with Andy Cheung to get his insight into the New Normal and the opportunities and challenges that lie ahead.

1. Economic slowdown pressures have increased in China since the second half of 2014. The GDP growth has fallen to 7 percent in the first six months of 2015. What are the challenges that Ernst & Young faces in the country?

Cheung: As a professional service firm, we do feel the pressure as our clients are now operating in a more challenging market with slower growth. We need to adapt to the changing business environment as China’s reform deepens, and to focus on client needs such as IT advisory, e-commerce strategy and outbound mergers and acquisition.

The change of the environment also requires us to refocus and redeploy our talents and resources. Industries including retail consumption, life science, medical, technologies, transportation enjoy higher growth, whereas high-energy consuming industries such as automotive, chemical and mining are in the middle of a tough time. However, take automotive as an example, there is strong demand around retail consulting.

Seven-percent growth is still impressive compared to many other countries, and is more sustainable as the economy transforms. As the reform deepens and capital market matures, there will be more demand for professional services.

EY is expected to retain a double-digit growth this year in China. We plan to expand our hiring by 300 to 2,100. Retention of talent is a major challenge to professional service firms like EY. The temporary slowdown in the China economy actually helps with our retention across our different service lines.

We opened new offices in Shenyang, Changsha and Xi’an over the past two years. EY is optimistic about the future and will continue to expand our geographical presence.

2. How will China move away from low-cost to high-end manufacturing? What opportunities does the Belt and Road Initiative provide?

Cheung: Encouraging innovation and technology transfer will be the key in transforming China’s manufacturing sector. The current leadership has emphasized the importance of fostering innovation via more financial and taxation incentives and promised to cut red tapes to unlock creativity.

The “Made in China 2025” blueprint unveiled in May is to comprehensively upgrade China’s manufacturing sector, making it more efficient and integrated, so that it can occupy higher end of global production chains.

With key sectors ranging from advanced information technology to new materials, the government pledged to design financial support, encourage outbound investments, as well as implement institutional reforms to advance the plan. Such initiative also calls for relying on market institutions, strengthening IP rights for small and medium-sized enterprises (SMEs).

Time is crucial. However, China has been doing excellent. Chinese firms now have more than five years of outbound experiences. Stage one for going global was to look for natural resources, and stage two is technology. Enterprises are looking for fields such as medical services and consumer-driven products.

As for “One Belt One Road”, the main purpose of the strategy is to connect dynamic Asia to developed Europe, help the development of countries and cement a more balanced structure of regional cooperation.

Investment opportunities will rise in areas such as transportation infrastructure, telecom, energy, tourism, cross-border financing and industrial cooperation. In the longer term, it will significantly improve the trade and investment infrastructure, promote China’s economic transformation and increase the country’s openness to the outside world.

3. The recent stock market turbulence and yuan’s exchange rate adjustment has aroused global concerns. What is your view on the fluctuations? What are the influences for the global markets?

Cheung: A stock market adjustment is inevitable after the China stock market indexes have more than doubled over a period of less than 9 months. The surge was impossible to go on forever. The adjustment should happen and the earlier, the better. As the fever fades, we’ll see a healthier stock market.

China’s stock markets are very young by global standard. Given the stock market is relatively immature, some State intervention is necessary. It is important for the government to step in to avoid violent market fluctuation which may have an impact beyond the stock market.

However, the government needs to maintain a balance between intervening in the market and letting the ‘invisible hand’ decide. This is important as China transforms toward a market economy and vows to give market more free power.

As for the RMB devaluation – RMB had appreciated 14 percent in one year before the depreciation against a stronger dollar. It was not only hurting export but also foreign direct investments. The one-off adjustment will help boost export and signals an important step toward free floatation.

The shock to global markets is more likely to be short-lived as China’s real economy remains steady and other major economies are reporting healthier growth. For example, China’s July retail grew a resilient 10.5 percent, and the US consumer spending growing more than 3 percent in Q2, more than twice the Q1’s pace. Nevertheless, should the RMB depreciation persist, China may export deflation and economic uncertainty to other economies.

4. How do you see the economic reforms unraveling further in China? What do you think are going to be the key takeaways from the ongoing reforms for your business?

Cheung: The reforms are facing strong headwinds from the current economic slowdown, which has led the government towards more stimulus measures.

The government has pledged to push forward the reform policies to transform the export and investment-driven economy to a more sustainable and consumption-driven one, and is carefully balancing between the structural reforms and growth imperatives.

The reform will bring more openness and create a more transparent business environment, generating potential demand for professional services thanks to the transformation of the businesses and a maturing capital market. Businesses will need to develop more agility and adaptability, review their China strategies and strengthen risk management capabilities to win in a rapidly changing market.

Many of the ongoing reforms and government initiatives such as SOE reforms, One Belt One Road and outbound investments have presented business opportunities to professional service firms like EY.

——–China Daily 29-09-2015