This will be the third leadership change I’ve lived and worked through in China. Although Deng Xiaoping was elderly, he still held the reins of power up until his death, and only then was the baton fully passed to Jiang Zemin and Zhu Rongji. Succeeded by the current incumbents Hu Jintao and Wen Jiabao nine years ago, in all cases the leadership transition passed off without a hitch. Although Western media likes to speculate, and often make things up (Jiang Zemin reported as being close to death earlier this year being a particularly insensitive example in extreme bad taste), the reality is the succession will not be an issue. It will generate plenty of column inches and guesswork about the personal and political nature of the expected new president, Xi Jinping, however, apart from the media spotlight, I do not expect any of this to affect the business climate. China will go on as before; all else is media speculation and can essentially be ignored.

I find it astounding the number of people who feel that a 7 percent to 8 percent GDP growth rate in China is a portent for disaster. Clearly, it cannot be and especially when viewed against the growth rates expected in the United States and Europe next year. These are expected to be little more than 2 percent (and in the case of Europe, possibly worse) and the message is clear: if MNCs or other businesses want to get growth into their performances for the foreseeable future (and certainly for 2012) they have to be in Asia, and China is almost a given.

The simple reason to why China’s growth rate has fallen is also a basic mathematical equation. With the Chinese economy – now the world’s second largest – growing at such a tremendous pace for the past two decades, a slowdown has always been inevitable. As I explained to a U.S. journalist from the Boston Globe just last week, if in year one I make US$100, and in year two US$110, that’s a 10 percent growth rate. But to sustain that 10 percent growth in year three, I don’t need to make an additional US$10, I now need to make US$11, and so on ad infinitum. Continuing growth rates of 10 percent a year have long been implausible, and now the sheer economic size of China has caught up with it. GDP growth of between 7 percent and 8 percent for China 2012 will be an amazing performance, and one that should catch the eye of every Western executive. Simply put, growth is in China.

This is an issue for smaller businesses, and many may find it too difficult to cope if they are at a financially critical stage of their business development. However, as I mentioned, in emerging markets, it pays to be aware that things can come up and bite you. Although I personally believe the whole management of the social welfare issue as concerns expatriate employees, and possibly domestic employers, has been handled very poorly by the Chinese administration, again, the reality is that these additional costs will be an absorbable burden for most established businesses. This may mean the foregoing of salary increases for many expats during 2012 as the money originally budgeted for that will now have to be swallowed up in increased social security payments, but this blip should be overcome during the course of the year as the costs get better integrated with cash flow. A nuisance? Yes. Necessary? Probably not. A big problem? No. Expats may find annual salary increases on hold for 2012, but they should be back in the equation in 12 months’ time.

Concerning rising labor costs, this affects principally the minimum salary level, which is being raised at a rate of 20 percent annually until 2015. Although this has impacted on low-margin, labor-intensive industries across China (and especially in the South), this is also a result of changing demographics and a need to ensure low-paid, unskilled workers are not exploited. Many companies affected by this have relocated to Bangladesh, Vietnam or elsewhere in emerging Asia and live on in another country. The upside of increasing wealth through rising labor costs though is an increasing consumer middle class. Bring that on – we all want to sell to China, and with an estimated 250 million considered middle class at present, and 70 million of them to Western standards – an increase in wealth throughout the Chinese population only means better quality and more opportunities to sell products and services to this dynamic market.

I looked at budgetary issues for businesses in China and dealt with some of the general perceptions of what could happen over the year, from the impact of the new generation of leaders coming in, to social welfare for foreigners being introduced. In this piece, we’ll examine some of the trends starting to occur in China, and especially those that affect foreign investors in the country.

The impact of social welfare being imposed upon expatriates in China does add a significant chunk of expense to corporate overheads as the employer has to contribute the lion’s share of this amount. The localizing of workforce in China has been going on for as long as I can remember, and occurs when Chinese knowledge meets expatriate and then becomes more operationally desirable due to communication and expense issues. This will impact on non-essential expatriates in China with limited language or expertise skills. I’ve written about the options such personnel have in terms of India and looking for work elsewhere in Emerging Asia, however this trend is one that will carry on over the next 12 months. It’s already impacting upon our firm, Dezan Shira & Associates, where for slightly different reasons two of our senior expatriate managers in Shanghai and Guangzhou are being relocated to Delhi and Hanoi to deal with expansion and growth in those markets. However, their China replacements will be ethnic Chinese professionals and not Europeans or Americans. Your China expat friends and colleagues may end up elsewhere in Asia during the course of the year.

While I mentioned yesterday that I felt China GDP would grow at a rate of 7 percent to 8 percent during 2012, what I didn’t suggest was that this will not be uniform across China. Some cities next year will see a drop below this (although I doubt that will crop up in official stats), others will perform rather better than others.

Growth is occurring at a faster rate today in the third and fourth-tier city level than in the first-tier right now (for the same mathematical reasons I also spelled out yesterday). Simply, when a city like Shanghai has a Maglev, two airports, and all the luxury brands you can fling an Amex Platinum card at, how much more can you grow? Compare that to Wuhan, Chengdu or even Changsha or Lanzhou, and clearly, growth in infrastructure and consumerism has further to go in these locations.

It’s also all about spread. China’s middle class market is estimated to be at 250 million (that’s roughly equivalent to 78 percent of the entire population of the United States) yet rather selfishly, they’ve not all congregated into one ultra-super-duper mega city that is easy to access. Instead they’re living all over the place. With 30 mainland China provinces, it’s easy to name 60 cities in one go, all being the first and second largest in each province. Expand that to the top four biggest cities in each province and you get a sense of the scale. Most are not coastal; where much of the growth has been taking place. This simple dynamic stresses the obvious – its inland China that is set to boom.

There are also three important drivers to this. First, the inherent growth rate increases as they begin to play catch up with their wealthier coastal cousins, which is defined by a State-driven policy to encourage this. Secondly, the lower wages on offer compared to the coast are proving attractive enough for many businesses to relocate there. Thirdly, a rise in the wealth of China’s lower class to becoming middle class is underway in these cities, pushing demand for consumerism – also a matter of State policy.

This all means that manufacturers looking for lower labor costs, and companies wishing to sell products nationally, are simultaneously expanding inland. Dezan Shira & Associates will too – we’re targeting Chengdu as a strategic investment for 2012, and are also looking seriously at Wuhan and Chongqing down the line. But for some far larger MNCs, the phrase “second-tier city” is already old hat. As Gordon Orr, the Asia Chairman of McKinsey, told me over lunch together at a recent China conference, the new dynamics are all about reaching into the six and seventh-tier cities in China.

The truth concerning India, seemingly poised by the media either as the next best thing or a chaotic mess, is that it lies somewhere in the middle but much more on the positive side (India’s chaos is much like chaos theory, that apparent randomness is actually all by design). As the world’s largest democracy, it’s much more a bun-fight than even the EU can muster these days, and adding in several large doses of madras curry powder too. It may appear volatile, but things are increasingly getting done.

Once the much awaited tax reforms are passed, India’s trigger as a hot destination will have finally been pulled and FDI will pour in. Forget the China comparisons, they’re largely meaningless. What you need to know is that China-India bilateral trade is booming, that India has a free trade agreement with ASEAN, it has an insatiable desire for infrastructure projects and development, its GDP growth will overtake China’s next year, and that it is demographically poised to become the world’s new cheap labor pool while at the same time possessing a middle class population of some 250 million (similar to China).

Unlike China today, India offers both cheap labor for export-driven manufacturing and a massive domestic market to sell too. Next year, 2012, marks Dezan Shira & Associates’ sixth year of operations there, and our India budget has to be highly aggressive just to keep up with growth and investment demands to keep pace. If any of those stats look of interest, you and your business should be evaluating the Indian market. Check out the details on our sister web site India Briefing or contact our primary office in Delhi for orientation assistance if you need help with understanding the country or legal/tax advice. Our Doing Business in India Guide is also a national best seller there.

It’s as simple as this – MNCs need to be in India now if you want to get into a market growing at 10 percent a year for the next two decades. India is taking up the baton from China’s development and population dividend.

ASEAN is a trading block of 10 Southeast Asian nations with a combined population of some 580 million and a total annual GDP of some US$1.8 trillion. That’s an economy about the size of Brazil – one of the BRICS of course. ASEAN includes regional giants such as Singapore (its de facto financial capital), Indonesia, Malaysia and Thailand, while also including oil rich Brunei, Cambodia, Laos, up and coming Vietnam, the Philippines (currently the world’s largest destination for BPO) and newly friendly Myanmar.

If that isn’t enough, it also has significant free trade and double tax agreements with both China and India. That means it is possible to site a business in ASEAN and sell throughout Asia, including to China and India, from there at tax-reduced rates. This is why Singapore especially is developing as a regional hub – see my piece on Singapore versus Hong Kong for holding Asian operations – and is also why Dezan Shira & Associates established an office in Singapore earlier this year.

For investors who can afford to expand internationally more good news awaits in much of emerging Asia as well – most of these economies are also doing exceptionally well when compared to the United States or Europe. Asia (and ASEAN) are the places to look for growth.