Chinas Strengths and Weaknesses

MappingBusiness Opportunities in China

Chinas Strengths and WeaknessesMain problem: Wrong model of development model?GDP = private consumption + gross investment + government spending + (exports imports)China is heavily export and investment oriented:

In the US consumers spend around 70% of GDP. Most other developed economies follow this pattern the UK, Italy, Germany and France are all around 60% of GDP. Even emerging economies such as South Korea and India manage around 55% GDP. China is different. Despite consumption hitting 47% of GDP in the 1990s, it has fallen back in recent times to around 36%.2China's economic transformationVideo 10 min3Producing more competitive products but lacking true innovationThe technological products are largely developed incrementally (no disruptive innovation). The new inventions are often only refinements of imported pre-existing technologies.Import/assimilate/re-innovate model does not foster a climate of original innovation.

Why?China has a cheap workforce. But for how long?Cheap labor rates were and still are crucial to the Chinese economic boom.BUT Chinas supply of cheap labor is going to run out soon:Workers are already becoming more assertive in their demand for higher wages and better benefits.The whole Chinese society is ageing very fast (one child policy) = reduciton of pool of new cheap labourforce.

China will no longer be a cheap world factory:A large wage gap remains but even narrowing it will have a big impact. Jeff Immeltof GE claimed thatan American factory worker can be competitive at $15 per hour with a $3 worker in China.Bangladesh and Vietnam are now lower-cost manufacturing centers than China even Thailand, the Philippines, and Mexico are becoming wage competitive.Productivity per manufacturing worker is also better in the United States than widely assumed. Hyundai, for example, has car plants in South Korea, the United States, China, and India and unit per hour production is actually highest in Alabama.World-class Indian car axle maker Bharat Forge found that Chinese workers in its plants had only 40 percent of the productivity of other workers. The Pune hub (near Mumbai) has become much more competitive because of trained labor and better transportation (a container trip to the port used to take at least two days but now only four hours and the port is more efficient).Of course, Chinas enormous competitive advantage is not just in wages but also in its scale for assembly-type production, infrastructure, internal competition, and growing domestic market. These advantages are not going to disappear overnight but are now being questioned.

5Flawed investment policyLong-term plans include aggresive targets for economic growth, innovation, and sustainability (for example 15 percent of energy from renewables till 2020).BUT investment policies are plagued by malinvestment (i.e. can non-market forces decide on such a huge amount of investment efficiently?).

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Weak legal system and corruptionNot only cannot protect human rights, but cannot also protect rights of a business.For example:Courts are not independent and will in general favor domestic party or a friend.Properties can be seized arbitrarily.Governement is corrupted (15 percent of GDP!) and discriminate on the friend/no friend basis.Intellectual property lights (enforcement still weak) - annual economic loss accounts for eight percent of GDP.

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Weak institutionsQuality of a countrys institution as important as the development and strength of its market processes. Tension and opposition necessary to keep market honest.Non-market institutions include:Independent courtsUniversitiesFree pressWelfare systemsLabor unionsThese nonmarket institutions keeps markets in check. China needs them, but don't have them.

Non-privatized industriesCommunist party still retains the control of most of the state owned companies in strategic industries:TelecomEnergyTransportationSteel productionThese companies limited growth of productivity in recent 20 years.Private owned companies 40 70 percent more productive.