Economic engine continues good performance

1 October 2014

The best years of China’s economic growth are history, but the country’s economy is still growing at an impressive pace.

Last year, China’s GDP grew by 7.7%. The forecast for this year is slightly over 7%. Meanwhile, the euro area is expected to barely reach a growth rate of 1%.

China already accounts for 15% of the global economy. “China is about to overtake the United States and become the world’s biggest economy. This will affect the global economy in numerous ways during the coming decades,” says Ali Malassu, Head of Strategy, UPM Paper Asia.

China is now focusing on more sustainable growth rather than just aiming at big growth rates. Until now, the export industry and large infrastructure projects have spurred the economy on. Now China wants to provide more services.

“Urbanisation increases the demand for services and balances the economic structure,” Malassu says.

New focus

Large state-owned enterprises have traditionally formed the backbone of the Chinese economy. Now the aim is to rationalise the operations of these businesses. Improvements to the operating conditions of small and medium-sized enterprises are also being planned to diversify the economy.

“Constant investments in infrastructure are also needed so that infrastructure does not become a bottleneck hindering growth like we can see in India. The construction of the road network, railway network and metro systems will continue long into the future.

“Increasing household consumption is also an important objective,” Ali Malassu adds.

Consumer spending to be changed

China has a high savings ratio compared to the western world. Chinese people are often used to saving money for a rainy day since the country has not had an extensive social security system as in many western countries.

The Chinese household registration system – hukou – is slowly being modernised. This modernisation would guarantee migrant workers who have moved to cities the right to various services, such as health care and education for their children.

“The slowly improving social security system will probably have a positive impact on consumer spending.”

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China has a high savings ratio compared to the western world. Chinese people are often used to saving money for a rainy day since the country has not had an extensive social security system as in many western countries.

China must become more competitive

Year by year, salaries have grown in China. As a result, some companies have moved their production to cheaper countries such as Vietnam, Myanmar and Indonesia. Higher labour costs increase pressure to improve productivity. China’s goal is to increase the production of higher added value products by investing in new technology and R&D.

Industrial production also has its challenges. Improving resource efficiency and decreasing plant emissions have become top priorities.

“Demographic change will also require increased efficiency in the future. An ageing population is as big a challenge in China as it is in Europe,” Malassu points out.

Other areas requiring investments include the construction of more efficient power plants and better transmission networks.

China will continue to be dependent on coal-fuelled energy in the future, but the country is also increasing its production capacity of nuclear, wind, solar and hydro power.

Concerns over incurring debt

According to Malassu, the liberalisation of the banking and financial sector and the full convertibility of the yuan are major challenges to the growth of the national economy.

So is China’s internal debt. As a result of its excellent export income, the country has managed to collect unprecedented foreign exchange reserves, but local governments have incurred debts to fund huge infrastructure projects. As the economic situation in the building industry has deteriorated, the income local governments receive from selling building land has declined.

Many inefficient state-owned enterprises also have heavy debts.

The debt of households has also increased as a result of purchasing apartments, cars and consumer goods.

Property prices under control

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“China is about to overtake the United States and become the world’s biggest economy. This will affect the global economy in numerous ways during the coming decades,” says Ali Malassu, Head of Strategy, UPM Paper Asia.

The rapid growth of property prices in growth centres has long been one of the main concerns of the Chinese economy. A violent drop in prices would shake the economy since a significant proportion of consumer funds is tied up in property.

However, Ali Malassu doesn’t believe that the real estate bubble will burst.

“The situation has remained under control. The government has taken various measures to limit increases in prices. It has also supported the sector when necessary.”

Good prospects for paper

As a whole, Ali Malassu believes that the situation for the Chinese economy is rather good – as are its future prospects.

Urbanisation, the growth of domestic consumption, the gradual rebound of the world economy and the continued Asian economic integration create a strong foundation for continued economic growth.

“A slightly slower growth rate will probably contribute to better allocation of resources and the modifying of economic structures in the medium term.”

Malassu says that economic growth, the increased purchasing power of consumers and urbanisation are also significant to the development of the paper product market.

“The demand for paper products will continue to grow, although the growth rate has slowed down. There are major differences in demand depending on the paper product, customer segment and region in China. The digitalisation of the media industry will also have its own impacts on the market for graphic papers.”

Fragmented paper market?

The Chinese paper market is highly fragmented. According to estimates, there are 3000 companies producing paper products in China. The 10 largest companies account for approximately one third of the production capacity of paper and cardboard.

The Chinese print paper market mainly focuses on fine papers. There is currently overcapacity in the production of fine papers and, according to Malassu, this will affect the Chinese market for several years.

Capacity adjustments change the market

The Chinese government’s aim to close polluting paper mills that use outdated technology will also have an effect on the market.

“Closing down outdated mills will not have a major effect on the overcapacity situation since new investments in paper production are also being made. Furthermore, most of the outdated mills have already been closed.”

According to Malassu, the demand for label materials is growing rapidly in China. The growth is a result of the trends already mentioned, the development of retail trade and distribution networks, the increased use of automated product labelling and the growing industrial use of adhesive tapes.

“UPM label materials also have other potential end uses.”

Close cooperation with customers

According to Ali Malassu, a company that selects the right products, market areas and customer segments will prosper in the current market situation. However, further measures will also be required as the competition gets tougher.

“We must get as close to our strategic customers as possible and get them to commit to our business by providing better service than our competitors and developing our cooperation. The importance of distribution channels will increase in the fine paper business,” Malassu says.

UPM is one of China’s leading office paper manufacturers. In coated fine paper, the company focuses on lightweight, high quality paper grades that printers use in magazines, catalogues and advertising leaflets. A number of magazines, including the Chinese version of Elle, are printed on fine paper manufactured by UPM.

UPM is currently investing in label material production in China.

“Once the new production line at the Changshu mill is complete, we will be able to deliver products to our Asian customers more rapidly and perform product development based on the needs of the local markets.”

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UPM is currently investing in label material production in China. “Once the new production line at the Changshu mill is complete, we will be able to deliver products to our Asian customers more rapidly and perform product development based on the needs of the local markets”, says Ali Malassu.

Environmental investments add to competitiveness

The demand for environmentally friendly and certified products will increase in Asia in the future. This will improve the competitiveness of companies like UPM.

Malassu says that environmental matters are important to specific customer groups. These include global copy machine manufacturers and international publishers printing magazines or books in China.

“We have been able to show them that UPM’s environmental investments in China have been at the same level as in Europe from the very beginning. This is a big competitive advantage for us compared to Chinese paper manufacturers,” Ali Malassu says.

Concern for the environment grows

Malassu believes that environmental awareness will gradually increase everywhere in China. The smog threatening the health of city dwellers, factories polluting waterways and agricultural land, and toxic substances found in food have also alerted the authorities.

“People want environmental performance to improve, but China is very large. Not all the decisions made in Beijing are implemented elsewhere in the country.”

China has made changes to its environmental legislation and tightened the limits for production plant emissions. Nevertheless, there is still a lot of room for improvement in the local implementation and supervision of regulations.

Biofuels interest also

According to Malassu, an increasing number of people in China now understand the result of maximising economic benefit at the cost of the environment. However, this is not currently reflected in consumer choices.

“Few individuals or companies are ready to pay extra for an environmentally friendly product, so in this aspect the Chinese market is still significantly behind Europe.”

China does not currently have a major demand for advanced products, such as biofuels and biochemicals. However, it is highly likely that the situation will have changed in a couple of years’ time.

“Some Chinese companies have already tested biofuels. One of these companies is China Eastern Airlines that has used biofuels on its commercial flights,” Ali Malassu says.

 

Text Matti Remes

Photography Qilai Shen, UPM

UPM Biofore

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