On Monday, March 5, China announced that its GDP target for the full year 2012 is 7.5%, lower than the government target of 8% in 2011. This number is also lower than many financial analysts’ estimates and the IMF’s latest estimate of 8.2% in February. At the same time, the government also announced that its consumer price index (CPI) growth estimate is 4% — the same as the 2011 target.

This slight decrease is in line with our recent observations of the overall China economy. Some key reasons for the reduced estimate include:

  • State-owned enterprises (SOEs) have slowed down. In the banking sector, growth from private banks in 2012 is expected to be at least 10% to 20% higher than the “Big Four” banks.
  • Government investment in infrastructure has been revised. For instance, many new high-speed rail projects were put on hold after the Wenzhou train collision in July 2011.
  • Increasing labor costs in China have hurt exports. Foxconn, the largest employer in the manufacturing sector in China, has again increased workers’ base salaries by 16% to 25% beginning in February 2012.

Other challenges to sustaining strong GDP growth include increased government control of the real estate market in the form of forbidding households from purchasing third properties (which has a significant impact on many relevant industries) and insufficient government support to the private sector for securing bank loans (especially those state-owned banks mostly issue loans to state-owned enterprises only).

All of these challenges make the Chinese government worry about maintaining a reasonable level of growth — and the political stability that comes with it. We believe that the government has to increase its support of the private and SME sectors to continue growth and avoid any political instability before the government changes in 2013.

What does it mean for the IT market? 

  • Forrester estimates that IT spending in China in 2012 will grow by 13.6%, down from 18.8% in 2011. The CAGR for IT spending from 2011 to 2015 is estimated at 13.7%, meaning that we expect ongoing growth in IT spending to remain stable.
  • SOE and public-sector spending on IT will slow down. The public sector accounted for 21.7% of all IT spending in China in 2011; that percentage exceeds 50% when SOEs are added in. We believe that this share of total IT spending will decrease as the structure of the economy changes in the next two to three years, compared with growing SME and private sectors. We believe the new opportunity area for multinational (MNC) IT vendors in the next two to three years will be medium-size enterprises.
  • The growth area in the SME and private sectors will lead to acquisitions. MNC vendors will be more active than ever in buying or investing in local ISVs or IT vendors with SME expertise.

In summary, we believe that SMEs will be the key battlefield in the next three to four years for IT vendors, while partnership/M&A opportunities will increase for MNC vendors to better get access to customers in China.