Moving inland is good for business

What are the latest big changes in China? For businesses, they include the shift to inland areas, rising costs, development of the service sector and a gradual lowering of growth.

Responding to these challenges depends on whether the changes are long term or just temporary blips. The fundamental driver of these changes is demographics, so they are definitely here to stay. China's workforce will start shrinking in a couple of years. By the mid-2020s the total population will be in decline.

The good news is China's urban population will not stop growing until around 2040, according to Economist Intelligence Unit forecasts. The challenge is to take advantage of three more decades of growth by going inland and preparing for opportunities in the service sector.

It is clear that some of the best opportunities lie in inland China. Since 2007, the central provinces have been growing faster than those on or near the coast. For business this poses a difficult problem. Choosing a location for sales or investment is no longer just about making a judgment on the relative merits of Beijing and Shanghai.

In 10 years' time there will be dozens of cities with the income level Beijing has now. Investors will need to be as familiar with Zhengzhou, Pingdingshan and Jiaozuo (cities in Henan province) as they are now with Shanghai.

As labor costs rise and investment growth slows, the service sector in China will grow in importance. Specific opportunities here will depend heavily on the pace of policy changes. Will the government loosen restrictions on private universities, for example?

Shanghai's future as a global financial center, and the accompanying creation of high-paying jobs, will depend on a still uncertain timetable for liberalization of cross-border capital flows.

The issue of the impetus for reform through government policy is crucial. Businesses will do whatever is needed in the circumstances. The real question for the future growth in China is what the government should be doing to create more opportunities.

This is not fundamentally about Chinese policies being changed to meet the needs of foreign investors. It is about China maximizing its own opportunities for growth.

China is currently making significant progress in laying the groundwork for internationalization of the renminbi. This commitment to policy reform needs to be broadened to put a firm timetable on other agenda, such as reform of State-owned enterprises, rural land reform and liberalization of the financial sector.

The author is director, Access China, Economist Intelligence Unit, Beijing. The opinions do not necessarily reflect those of China Daily.