Whats next for China?

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1. Embrace the new trends in urban development.Companies should design city-specific solutionsproducts, marketing approaches, and operating modelsthat meet the quite varied needs of the smaller cities that are expanding rapidly and underpinning Chinas long-term growth. In addition, they should optimize their resources across the hub-and-spoke city clusters emerging throughout China. Hub cities will increasingly service the needs of the spoke cities, where most manufacturing takes place.

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3. Foster new skills and innovation capabilities.The growth of the urban labor pool is slowing as the countrys population ages. Companies will have to increase their productivity through training, automation, more flexible production, and enhanced employee loyalty. They will also need to foster new skills, from strategic planning to the maintenance of high-tech equipment. At the same time, in parallel with the shift to an increasingly service- and consumption-led economy, Chinas innovation capabilities can be expected to improve rapidly. Companies there should nurture them to develop products that meet the demands of this important and growing market and of other markets around the world.

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These new policies will favor household income growth, improve the social safety net, and support the expansion of the service sector and private enterprises, especially small and midsize businesses. Two markers of a more economically developed society will be the higher productivity of its workers and higher productivity and greater efficiency on the part of government. These trends will create more and better-paid jobs and thus raise the share of the national income in the hands of consumersthe key determinant of Chinas future economic profile (exhibit).

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Dynamic domestic players and focused multinationals are helping China churn out a growing number of innovative products and services. Intensifying competition lies ahead; heres a road map for navigating it.

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Chinas economyis starting its historic shift to a more consumption- and service-driven model that should help sustain the countrys growth, albeit at a slower rate, over the next decade and beyond. As Novembers 18th congress of the Chinese Communist Party showed, new government policies are helping to move the economy in this direction, even though investmentthe historical motor of Chinas growthwill still command the lions share of the economy in the near term.

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As Chinas strong financial-services market matures, the companies in it must develop new business and operating models to compete for a more diverse and demanding customer base.

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Chinas expanding cities will play a major role in these trends. In particular, the accelerated rise of smaller cities will make a key contribution to growth: during the next two decades, the dozens of cities with current populations of less than 1.5 million will contribute 40 percent of the total increase in urban GDP. Cities with 1.5 million to 5.0 million inhabitants will contribute about 25 percent and existing megacities the balance.

2. Focus on the growing demand for services and consumer goods.As disposable incomes rise, consumers will be able to buy more services and goods. That should spur the expansion of new service businesses ranging from catering to financial services, as well as the further expansion of demand for consumer products, across Chinas immense and growing market. At the same time, business services will grow more quickly as the countrys economy continues to develop.

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