Executive
Perspectives

The China growth
opportunity
Six things to know for business leaders0

Copyright © 2020 by Boston Consulting Group. All rights reserved.

JANUARY 2021

focus of this document

This document provides a fact-based, economic
perspective on China. It discusses economic growth
opportunities in China and highlights what we identify as
key implications for business leaders.
Undoubtedly, the trajectory of the economic development
in China has been very dynamic over many years. Despite
COVID-19, the past year has been no different, and we
expect this dynamism to continue in the years ahead.

1

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

Preface

A lot has been said and written about China and its
relationships with the rest of the world, especially in lightof the COVID-19 pandemic that unfolded in early 2020.

1

Specific COVID-19 steps have supported a quick rebound; the economy is back and will
likely contribute 25-30% of the world's GDP growth over 2020-2030

2

Behind the rebound is a structural shift in the economy towards domestic consumption– with 78% of the economy to be driven by consumer growth, services, and innovation

3

China has transformed from a low-cost manufacturing center to a growing hub ofbusiness model and technology innovation

4

The trade war and decoupling will have multiple consequences that will need to be
managed but will not necessarily slow down growth5

China's commitment to the Paris Accord and the Net-Zero 2060 goal will drive
massive investment, innovation, and partnership opportunities

6

The 14th Five-Year Plan will solidify focus on specific areas to drive growth
Source: BCG

2

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

Six things to know about the China growth opportunity

Non-ExhaustiveChina has taken a very different approach to COVID-19 andhas largely contained the impact since the initial Q1 shock

EPIDEMIC CONTROL

Cases in China peaked in February '20 but have been on adecline since with no major resurgence
Daily new cases per million1

Dynamic regional& border control

4
3
2
1
0

The government established control measures that
restricted the epidemic to a relatively low level of cases

Apr

Jun

Aug

Oct

Dec

• Border control: quarantine and double tests2

Rapid testing
infrastructure• 14K health checkpoints in Wuhan & Hubei

Systematic multilevel isolation• Special hospitals for COVID-positive people

Health code &monitoringFeb• High-, medium-, and low-risk regions classified

Change inhealth habits

1. 7 day rolling average; 2. 14 days and two consecutive negative nucleic acid tests before being released from quarantine
Source: Our World in Data; BCG analysis• Immediate & massive testing in hotspots• Close contacts: home quarantine for 14 days
• Management of public areas with QR codes• Efficient tracking of close contacts• People wearing masks in public – even with 0cases in many areas

3

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As of 31 Dec 2020

Although GDP took a hit in Q1 '20, sectors
rebounded quickly in a phased manner

ECONOMY

China's GDP is poised to demonstraterobust growth over the next decade

Performance '20 vs. '19 (%)

Sectors rebounded1

China is expected to be the only majorcountry with positive GDP growth in 2020-21

Q1• Necessities, medicine

2

From 2020-2030, China will deliver 25-30% of
the world's GDP growth

Q2

-6.8

• Electronics, finance

3.2

GDP annual growth rate (%)
10

Q3
Q4E

4.9
6.7

• Auto, lux, liquor, realestate, infrastructure• Consumer services,logistics

8%
5%

5
0

China

2021

5%

3%

2021-2025

Rest of World
5%

3%2025-2030

Source: IMF, World Bank, OECD1

China's GDP growth expected to be +2% in 2020 vs.
-4% for world1

China is expected to account for ~20% of the world
economy by 2030

1. China and world GDP growth forecasts are based on base case, a combination forecast with most recent data, global institute reports and BCG analysis
Source: IMF, World Bank, OECD, BCG analysis

4

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

China's economy had a quick recovery in 2020 and is expected to
be a major contributor to the world's GDP growth in the futureIndustries in China are demonstrating resilience and fasterrecovery compared to the world

ECONOMYConsumerproducts

China

World

Fashion &luxuryEnergyTravel &tourism

Major retail enterprises’
monthly sales

Full-year
estimated sales

Consumption of oil
products/oil demand

Hotel monthly
occupancy rates~98%+20 to +30%

+1.1%

~97%

~95%

-45 to -25%

-9.5%

~62%

recovered compared
to Sep 20191

recovered compared
to Sep 20192

vs. 2019

vs. 2019

vs. 20193

vs. 20194

recovered comparedto Oct 20195

recovered comparedto Oct 20195

1. Major retail enterprises referring to 100 brands on the list of PRC Ministry of Commerce, recovery defined as YoY, data as of Sep; 2. Data as of Q2; 3. Consumption of refined oil products,
cumulative value; 4. World oil demand; 5. Data for Oct 2020 compared to Oct 2019
Source: PRC Ministry of Commerce, Oxford Economics, 2020 BCG x Tencent Digital Luxury Report, OECD, J.P. Morgan PMI index, China National Bureau of Statistics, OPEC, STR Global, UNWTO,
5
BCG

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

Non-ExhaustiveBeforeECONOMY

FutureHuge infrastructure
investment by government

Growing middle class withincreasing domestic consumption"Factory of the world,"
export orientation

Diversified industries with vitalcommercial services

Increasing contribution of consumption to GDP growth
China GDP growth structure (%）
2%
53%
45%
00-10

3%
30%
67%

22%

[…] As labor and land costs are growing […], China is transitioning to a […]services & consumption-driven economy.

0%

78%

- China Briefing: Leading Trends in China's Services Sector after COVID Disruption, 2020

Net export
Investment
Consumption

10-20E

20-30E

Source: China National Bureau of Statistics, Oxford Economics, BCG analysis

Benefiting from rising household income and technological advances […],
consumption & services have emerged to be the new engines for […]economic growth.
- S&P Global: China's New Economy Sectors: How Are They Doing?, 2020

6

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

China is shifting from being the "World's Factory"
to a consumption- driven economy

ECONOMYServices estimated to contribute ~61% of GDP in 2030, up from ~54% in 2019; financial, information& communication, and public services fastest growing
Sector sizes 2019 vs. 2030E (VA1, $T)

CAGR2 (2019-30E)

24.6
9.1%
2.8%
6%

Services
~54%

7.5%

~61%

14.7

19.1%

2.2%

15.2%

10.7%

17.7%

Agri ~7%

3%

11.2%

Industries
~39%

19.5%

28.0%
4.5%

7.4%
2019

~34%

24.5%
3.8%

2%

2.7%

3.5%

5.3%

~5%

Financial services

7%

Information & communication

7%

Public services3

7%

Business services44%

Other services

6%

High-tech goods

6%

Basic metals & metal products

2%

Elec. & mech. machinery

2%

Other industries

4%

Agriculture, forestry & fisheries

2%

2030E

1. Value-added output is a measure of the value of all the goods and services produced in a sector or industry, excluding the value of intermediate consumption. Real value-added is expressed inconstant prices (adjusted for inflation and exchange rate movements); VA is in USD billions at 2015 prices; 2. CAGR is based on value-added output; 3. Public services includes public
7
administration, defense & social security, education, health care & social work; 4. Business services includes real estate activities, R&D, leasing, legal, professional & maintenance services
Source: Oxford Economics

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

Services sector is expected to play an importantrole in driving China's growth over the next decadeTop 10 attitudes among
Chinese customers1

CONSUMER SENTIMENTHigh digital & online spending is astrong dynamic in China’s rebound1

I live a richer life because of technology

90%2

Important to be respected by others89%3Work-life balance is important

89%

4

Children will have a better life than me86%

5Plan finances independently

86%

6

Optimistic about future

86%

7

Connection to cultural heritage

85%

8Structure my time to meet commitments

84%

9Career is important

84%

10

Relaxed and easygoing83%

Spending by channel type2
Net percentage of respondents planning to spend
more in the next month than before the outbreak (%)
+48
+16
China

US

-29

+6
France-22-49
Online spending

In-store spending

1. Based on the question "How strongly do you agree or disagree with the following statements?" across 56 statements, % of consumers who agree with the statement
2. Question text: “In the next month, what do you expect your spend to be relative to before the coronavirus outbreak?”Source: BCG CCI Global Consumer Attitudes and Needs research, China (N = 9100), September 2020; BCG COVID-19 Consumer Sentiment Survey, July–August, 2020 (N = 3,100–3,800),
unweighted, representative within ±3% of census or national demographics

8

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

Chinese consumers recognize the benefits of technology
and are optimistic and ambitious

Export-oriented manufacturingindustries diversifying supply chain

Selected examples, non-exhaustive

TRADE ANDGEOPOLITICS

High-end manufacturing industries reinforcing
footprint to meet domestic demand

Selected examples, non-exhaustive

ConsumerdurablesKorean white goods maker
moved production ofrefrigerators for US from
China back to South Korea

Automotive
vehiclesGerman auto OEM
increased production in
China instead of exportingfrom US to meet demand

ApparelUS apparel maker moving
supply chain out of China;
US imports from China
dropped from ~40% to ~22%

Telco equip.
& semiconductors

Japanese electronics company
expanding production in China
to meet local demand esp. for
5G infra.

Source: Press search, BCG analysis

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Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

Manufacturing supply chain shifts are visible – some sectors
are moving out of China whereas others are being reinforced

Pessimistic Scenario
Decoupling• Trade war escalates, Chinesecompanies blacklisted
Situation• Escalation in South China Sea& Taiwan

Base Scenario
Perpetuation of status quo• Less aggressive protectionism
by US & China for global
leadership• Europe & China continue ties

• EU ends up leaning on US

Trade Flow

• Strong decrease of trade flows
between blocs• China trade decreases

China GDP
GrowthImpact on
Sectors• Estimated at 1.6% in 2030

• Increased import restrictions
on multiple industries• Encouraged local consumption

Source: Eurasia Group, Bloomberg, BCG analysis• Trade more resilient than expected• Trade with US and EU decreases,
compensated for by trade with
ASEAN nations

TRADE ANDGEOPOLITICS

Optimistic Scenario
De-escalation of trade war• Trade war de-escalates;
globalization rebounds• Competition to become world
leader in next-gen technologies
continues between US & China• Trade flows continue to grow
• More diversified trade, more
intra-Asia trade & nearshoring• Estimated to be 3.5-4.5% in
2030• Stabilizes at 5.5-6% in 2021-2025& at 4.5-5% in 2025-2030• Electronics most exposed• Continued boom in tech.,healthcare, consumer sectors• Other manufacturing faces
moderate risks

10

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

Three potential trade and geopolitical scenarios thatneed to be carefully observed to understand implications

The 14th Five-Year Plan is under development and will shape priorities
Innovation-driven development

Dual-circulation policy

Jan 04, 2021

President Xi's New Year Address clearly
underlines the direction for Chinese
economy to focus on innovative growth

Green agenda

Dec
26, 2021
2020
Jan 04,China to promote its dual circulation
strategy by boosting consumption,
forming strong domestic market

Rural vitalization
Jan 01, 2021

Chinese President announced at the UN
General Assembly that China aimed to go
carbon neutral by 2060

Opening up to foreign investors
Dec 30, 2020

EU and China announced the political
approval of an agreement to open the
Chinese market further to EU investors

Urban development
Dec 30, 2020

Chinese government would undertake “ahistoric shift” to focus on comprehensively
improving the rural economy in 2021.

Dec 22, 2020

China promotes high-quality developmentof cities in 2021, while building livable,
green, resilient, smart and cultural cities

International cooperation
Jan 03, 2021

China
China launched
is facing an
its inevitable
1st free tradedecrease inagreement
the peoplewithof working
an African
agenation,
and a rapid
expandingincrease in its
thenetwork
numberofoftradeelderly
partners
peopleEconomic system's quality
Jan 05, 2021

Beijing has rolled out more measures
aimed at increasing efficiency of China’s
capital markets & quality of its companies
11

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

As of 05 Jan 2021

A

Increase focus on new drivers
for economic growth

B

Keep pace with changing
consumer behaviors

01

Tailor offerings to evolving demographics(e.g., fresh e-commerce for digital natives)

01

Learn best practices on innovative retail
formats and digital use (online & offline)

02

Rethink China strategy in line with opening
up of sectors to foreign investors

02

03

Ride the consumption boom in China andevaluate potential offerings and opportunities

Double down on growing demand
consumption areas (e.g., health andwellness)C

Use innovation as a growth engine

01

Leverage China as a source of tech innovation(e.g., by establishing innovation centers)

02

Adapt business model toward increasing
tech-driven consumer behaviors

D
01

Drive a sustainability agenda
Explore sustainable investment &partnership opportunities emerging
out of Net-Zero 2060 goal

12

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

Key implications for business leaders in light of the China growth opportunities

A.02

Improvement in business environment

Systemic interventions to attract foreign investors

Rethink China
strategy in linewith opening up

Ease of doing business ranking:2018

No. 782019

No. 472020

No. 31

8 key business reforms for better business climate
Focused agenda to improvebusiness environment
Policy reforms to attract
foreign investors
Foreign companies increasingly
entering & expanding
Joint ventures commonly used
for localized approach

Leaders need to evaluate
opening-up opportunities &adjust China strategy

Regulatory: Foreign Investment Law, 2020,
National & FTZ1 Negative Lists (2020)
Financial: Tax cuts and direct financing
Economic: 18+ new Free Trade Zones

Joint ventures utilized for localized approach• Ease of navigating local formalities, cultural know-how

Examples | China announces plans for 3 new
FTZs in Beijing, Hunan & Anhui (Sep'20)• Access to partner's existing network

Examples | International players increasingpresence in China• ~25% of Beijing FTZ to host a
global startup innovation center• US auto player opened first nonUS factory in Shanghai (Sep'20)• Advanced manufacturing
clusters to be set up in Hunan& Anhui• Leading financial institution held"cloud opening" in Shanghai(Mar'20)

1. Free Trade Zone; lists imply fewer restrictions
Source: Doing business report 2020, World bank; BCG analysis

13

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Non-exhaustiveLearn bestpractices oninnovative retail
formats & digital use
Accelerated adoption of digitalsales channel
Strong penetration of digital inoffline retail
Innovative formats arising fore-commerce sales

Leaders need to experimentwith innovative formats tosucceed in China and be at
the digital forefront

Strengthening the customer experience through a variety of innovative digitaland offline channels and formats
Livestreaming KOLs/KOCs1 recommend,shows
consumers place orders live

Short video

Consumers watch KOL/KOC1 videos,click link & place orders

Online toofflineConsumers place orders online& product is delivered to door

UnmannedretailConsumers purchase in vending
machines

Community
e-commerce

Community leaders initiategroup purchase, consumers join

Direct peer selling through social
Social customer to cust. e-commerce platforms

Example | China's shopping center groupplaces AI robots

Example | Chinese electronics company
demonstrated products in a livestream show

• Shopping group replaced info
center staff with AI robots• 2-hour livestream show withfounder (Aug'20)• Wide range of services throughrobots (e.g., store navigation)• 50M viewers & $30M sales insmartphones & TV

1. KOL - Key Opinion Leader, KOC - Key Opinion Consumer
Source: BCG analysis

14

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B.01

Double down on
growing demand
consumption areas

Increasing consumer
preference for health &wellness categories
Companies launching products
into these categories based on
shifting consumer demand

Leaders need to refresh theirproduct portfolio in line withchanging consumer demand

Chinese consumers, especially younger
shoppers, focus more on health

70%
76%

of Chinese internet users
consumed more healthproducts during the pandemic1

of affluent millennial Chinese
consumers focus more on
wellness than their parents do2

Example | Leading F&B multinational
launched healthy superfood drinks in China

Health-based categories saw an uptick
during COVID-19% of consumers who claimed they purchased more
expensive brands or products due to the virus3
Fresh &
organic foods

40%

Vitamins/supplements
Preventive
healthcare

32%
17%

Example | Chinese dairy giant launched new
products to meet evolving consumer needs• Uses technology to enable
personalization of healthy
superfood drinks• Launched enhanced-nutrition& sugar-free milk variants due torise in consumer focus on health• Made with 100% naturalingredients & recyclable
packaging• Developed own big data
platform to use consumerpurchase data to support R&D

1. As per April 2020 report by iiMedia Research; 2. As per 2019 survey by Singapore-based market research firm Agility Research & Strategy; 3.
Question text: “How do you expect your spend to change in the next 6 months across the following areas?", exclude categories with N <~100; 15
BCG COVID-19 Consumer Sentiment Survey, May 22-25 (N=2,963 respectively, unweighted, representative within ±3% of CN census)

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

B.02

Leverage China
as a source oftech innovation
China evolving from low-cost
manufacturing hub into a sourceof technology innovation
Attracting tech capital, andforeign companies establishinginnovation centers
Focus on building new use casesof latest technologies

Leaders should consider
leveraging innovations in
China (R&D, tech hub)Attracting tech capital
High-tech investment1 (incl.

seed/VC/PE), 2017-2020H1
China is leading in AI
progress
Share of active players in
AI2

Guangdong-Hong KongMacao Greater Bay Area

$313B
$231B

US Bay area

85

AI Piloting

53

AI Adoption

32

China

51

49

49

46

29

42

29
20

29
20

31
15

29
13

CH

Austria

22

US

France Germany

39
11

28

Japan

Examples | International players fostering innovation from China
German industrial manufacturing player set
up innovation hub, including:

US industrial conglomerate opened
innovation center, including:

Digital innovation: Implement & upgrade
digital transf. for Chinese partner companies

Joint product build: Cooperate with Chinesecompany to build cheaper aircraft typeIntelligent manufacturing: Generate smart
solutions through converging IT & manuf.

Smart logistics: Provide smart
solutions to increase productivity

Internet of Things (IoT): Collaborate with
Chinese tech giant to build IoT infrastructure

Talent access: Leverage additional highskilled talent in China

1. Including AI, big data, AR, autonomous cars, life sciences, etc, 31 high tag vertical categories tags; 2. BCG Report "Mind the (AI) Gap". BCG
surveyed more than 2,700 managers in September and October 2018, from a broad and representative spectrum of industries including
16
consumer, energy, financial services, health care, industrial, technology, media and telecom, as well as professional services and the public
sector. Source: Pitchbook, press search, BCG analysis

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021

C.01

Explore sustainable
investment &partnership
opportunities
China emphasizing sustainability

Selected sustainability opportunities

International agreements, EU examples

NEV1: Push R&D, productstrengths & penetration

NEV cooperation: Chinese & German
companies co-build 100k charging stations

Renewable energy: Scale up
alternative power generation

EU-China Energy Cooperation Platform(ECECP)

Process optimization:
Increase efficiency of energy
utilization

Chinese-European-Emission-Reducing
Solutions (CHEERS)

Net-Zero 2060 goal & Paris
Accord commitment
Opportunities arising acrosssustainability areas

Leaders should leverage green
investment options in China
and learn best practices

Example | German car
manufacturer

Example | UK
platform for energy &technology

Example | Australian
resources company

JV on R&D andproduction of hybrid
vehicles in China

JV between UK &Chinese research
centers for offshore
energyKnowledge sharing with
Chinese steel producer
to reduce emissions

JV's fully electric small
car to be introduced in
2022

Agreement to apply UK
tech-nologies in
Chinese market

1. NEV = New Energy Vehicles, Source: Press search, BCG analysis

Australian player toinvest $35M

17

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D.01

—Kristalina Georgieva, MD of the International Monetary Fund18

Copyright © 20202021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives Version 1.1. Updated 5 January 2021“

China’s fast recovery continues thanks to resolute measures incombatting the virus, mitigating its impact, and supporting
growth…China will secure the recovery and ensure balanced andhigh-quality growth, which will benefit China and the world."

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