Interview: Next 5 years crucial for China, says Ernst & Young

By Dai Tian and Chen Jia (China Daily) Updated: 2015-09-29 10:39

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.