| China Economic
Update 2007-2008
By many measures, the past
five years have been the best period ever in modern times for the
country. Gross domestic product(GDP) last year reached 24.66 trillion
renminbi, indicating a 10.6% annual real growth rate from 2002 to
2007.The country’s GDP last year was only about 2% lower than Germany’s
measured by a daily-weighted exchange rate, ranking fourth in the world.
 Real GDP growth
reached
11.4% in 2007, according to official figures.
It is also important to note that for the first time in many years consumption contributed more to growth than investment. Also in 2007, China replaced the United States as the world’s second largest goods exporter, next only to Germany. By the end of 2007, China’s foreign currency reserves had ballooned to US$1.53 trillion, the biggest in the world and 5.3 times the total in 2002. The general public is also benefiting from China’s impressive growth, lawmakers were told. In 2007, average disposable income in urban areas in China was RMB 13,786, 79% higher than in 2002. Average net income in rural areas in 2007 reached RMB 4,140, a 67.2% rise over five years. All of this is continuing to raise people our of poverty and to increasingly build a middle class. In fact Beijing's progress has been so successful that China could overtake the US by 2025 to be the world’s largest economy and is anticipated to grow to about 130% the size of the United States by 2050, says Pricewaterhouse Coopers. John Hawksworth, PwC’s head of macroeconomics, said the global centre of economic gravity was already shifting to China, India and other large emerging economies and this process had a lot further to run. There are still distinct problems: Inflation: Premier Wen Jiabao recently said before the parliment that inflation is now the top concern for China, as he pledged to take steps to slow the China's surging economic growth. Mr Wen said the government would seek to slow growth to around 8% this year, from 11.4% last year, and keep consumer prices from rising more than 4.8%. But Mr. Wen has also admitted that the inflation goal would be tough to meet after the cost of food and other necessities increased markedly last year, causing criticism and discontent with the government. Labor/Labor Relations - Labor Intensive Industries As it built its reputation as the world’s factory, China also was criticized as also the world’s sweatshop. Partially to help deflect this China adopted a new labour law. This law took effect in January and greatly improved labour protection and wage regulations. It also raised China based factory labor cost substantiallly and caused many foreign investors in labourintensive, low-margin industries to rethink China as their factory to the world. Although China didn't necessarily seek the size of relocation of labor intensive factories it may actually get some relocation may not actually be a bad thing, in the view of Beijing policymakers, as it will slow the rapid pace of foreign-reserve accumulations, act to dampen strong pressure from currency appreciation and hopefully slow down export growth. Goals Getting Harder to Achieve In what the Chinese government refers to as the ‘‘government work report’’, Premier Wen set China’s GDP growth target at 8% this year and said officials intended to cap inflation at 4.8%, the same as the 2007 level. He also pledged to provide 10 million more job opportunities and maintain an unemployment rate at 4.5% or lower. These goals could be easily achieved several years back. But it is not a few years ago. For example, foreign trade for example. Back in 2003, China’s exports were only 36% of the size of the 2007 figure, with a trade surplus only 9.7% as large. Foreign trade is now much larger and keeping it inceasing at the rates required to achieve the numbers above will be difficult. Now, many economists are arguing not whether or not the United States will fall to recession, but the length and the magnitude of the recession. Similarly, the future of EU is fading. This is certainly not good news for China or for the Chinese government in meeting the above goals. Quality, hygiene and safety problems of China-made products will certainly become key issues about which western politicians would like to make a stronger case, espescially in a U.S. election years. This and trade friction are going to make it politically more difficult for China at a time when the world economy will also be making it economically more difficult - net result a good year for China but probably not as good as predicted. The Processing Trade This policy to dis-incentivize what the Commerce Ministry refers to as the ‘‘processing trade’’ started in December when the Ministry published a new list of prohibited processing trade businesses covering 589 kinds of products. It was the second set of restrictions announced on the sector during the year. The processing trade, as defined by Beijing, refers to the activity of importing raw materials, components, accessories and packaging materials and re-exporting the finished products after processing or assembly on the mainland. According to a recent Shanghai report reprinted in the Bangkok Post, Huang Mingzhi, the director of the Taiwan Merchant Association in Shenzhen, expressed pessimism about the future of such businesses in an interview shortly after the regulations were announced. ‘‘Factories going bankrupt have been emerging in succession since late 2007,’’ he said. ‘‘More factories will close down or move after the Chinese New Year.’’
The Bangkok Post also quoted Liang Baizhong, the liaison official with the Economic and Trade Office of Hong Kong in Guangdong province, predicted tens of thousands of Hong Kong businesses would have to make a tough choice between closing or moving elsewhere in next two years. A Hong Kong wooden toy manufacturer in Shenzhen said: ‘‘The trend of bankruptcy among processing trade enterprises is becoming apparent. As I know, some will close soon and others want to wait for another half-year or one year.’’ The majority of the processing trade businesses in the Zhujiang River delta region (Pearl River Delta) are from Hong Kong and Taiwan. Their margins are based on cheap labour and raw materials and favourable taxes and are quite easily influenced by external factors. Based on current reports, up to 50% of these factories are thinking of closing and moving elsewhere and our company is getting increased requests by China based companies in high labor related industries like toys, garments, textiles, shoes, furniture but also many other more diverse industries to look at Vietnam. Large and medium sized businesses are moving their factories to cheaper places such as Vietnam, Thailand, or China’s West and Southwest. Some of this is being done overtly but much of it is going on in stealth, and some smaller and medium sized firms in China are even giving up their former company names and simply closing down and leaving. Besides small and medium-sized foreign businesses, big IT manufacturers in the Yangtze River delta region according again to the above newsreport are also being influenced by changes in China’s domestic investment environment. According to news reports, Taiwan Compal Electronics, the world’s second-largest contract laptop PC maker, decided to speed up moving its manufacturing base from Kunshan, a city in eastern China, to Vietnam. Compal had planned to invest $500 million at some point to build a laptop plant in Vietnam. But now it is speeding up the building process and the new plant is expected to begin production in the third quarter of this year. Compal expects monthly shipments from Vietnam to reach up to one million units by the end of 2009, as it aims to make half of its computers there by 2013. Since 1996, Compal has established several factories in mainland China. Now it will become the first laptop computer maker to leave China. ‘‘They have no choice but to do this, because their China plant has no further room to expand,’’said JP Morgan analyst Alvin Kwock. But the new labour law and the cancellation of some favourable policies were also said to have prompted the move. Though the company denied it would shift all its manufacturing to Vietnam, Compal did threaten to move to Vietnam if the local government could not provide preferential policies to help it reduce its manufacturing cost, eliminating the disadvantages of the new labour law. Compal has been the biggest foreign exchange earner for Kunshan City for many years. Compal president J.T. Chen once complained that the new laws would increase companies’ labour costs by 20%. With increasing manufacturing costs in mainland China, Vietnam and other Asean countries are becoming the new hot spots for foreign investors. A recent report by Japan’s Nomura Research Institute said that the Greater Mekong Sub-region spanning Vietnam, Thailand, Cambodia and Laos, would become the fastest-growing region in Asia for the next 10 years. Growth would be a direct result of demand set off by fast-growing China and India. According to John Hawksworth of PWC, apart from the fastest growing economy in the region could be Vietnam, with a potential growth rate of almost 10% per year in real dollar terms that could push it to about 70% of the UK economy by 2050. More of our useful articles:
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