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China watch 2014

12/31/2013 @ 1:00pm

The year ends with China on the precipice of big challenges. Growth is widely expected to slow again in 2014, as the country's economy matures and old standbys like exports and infrastructure spending lose some of their punch. Beijing has unveiled a raft of proposals to keep the economy humming for years to come, but the plan lacks specifics. Moreover, it isn't yet clear whether President Xi Jinping and top leaders have the determination or political clout to carry it out.

For foreign businesses, that uncertainty comes along with challenges in other area. Labor costs are rising. Regulatory scrutiny is tightening. Local competitors are adapting and innovating. As a result, some businesses are thinking twice about betting more on the world's No. 2 economy. Luxury brands have been caught up in Beijing's anticorruption campaign. China has never been an easy place to do business, but the challenges appear to be mounting.

The good news is that China still holds promise even as it leaves its double-digit growth years further behind. The nation is the world's largest consumer of cars, smartphones and groceries. Businesses are betting that a growing and more sophisticated middle class will pay more to ensure their food and their cars are safe. Its people--long lauded for working hard--appear more willing than ever to kick back with a treat or a tipple and otherwise spend on American-style frivolous consumerism. China's efforts to empower consumers have been frustratingly slow, but the progress is there.

Into this upcoming uncertain Year of the Horse, China Real Time will be watching a number of business stories as a gauge of the kind of market China is becoming.

#1: Local Competitors on the Rise

Apple. Samsung. And... Xiaomi? The little smartphone startup is helping to upend a gadget market once dominated by big foreign players. It now has a 5% market share in China on the back of aggressively priced phones that pack its own flavor of Google Inc.'s Android software. It isn't alone: Great Wall Motor Co. has posted modest share gains in an auto market where Western brands hold the strongest appeal.

Fast-food favorites like Yum Brands Inc.'s KFC now contend with local players Hui Lau Shan and Zhen Kungfu in addition to McDonald's Corp. One stodgy state-owned enterprise is outmaneuvering foreign rivals for choice store locations. Even in the intricate world of medical devices, local firms provide competition for the likes of Boston Scientific . Abroad, Lenovo Group Ltd., Huawei Technologies Co. and ZTE Corp. continue to capture a bigger share of the pie in their respective markets.

#2: Rethinking the Big Deal

Cnooc Ltd. last year completed its purchase of Canada's Nexen in China's biggest acquisition of a foreign company and one of its most ambitious moves to secure resources abroad. But the landscape was shifting under its feet even as that deal was sealed. Today, the boom in natural resources that defined the deal outlook over the past decade appears to have lost some steam. In the U.S., new technologies have led to an energy glut. Other commodities have also dropped in price thanks to new technologies, new finds and greater efficiencies.

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