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Why slower growth is good for China

China’s economy is, at long last, undergoing a rebalancing, with growth rates having declined from more than 10% before 2008 to roughly 7.5% today. Is this China’s “new normal”, or should the country anticipate even slower growth in the coming decade?

China’s rebalancing is apparent, first and foremost, in the export sector. Export growth has slowed from its 2001-08 average of 29% annually to below 10%, making foreign demand a far less critical engine of growth.

Moreover, manufacturing employment and output, as a share of the total, began to decline last year. In fact, in the first half of this year, services accounted for more than half of total economic growth. It is no surprise, then, that China’s current account surplus has shrunk rapidly, from its 2007 peak of more than 10% of GDP to about 2% of GDP today.

This rebalancing has helped to improve China’s income distribution. Indeed, in recent years, labour’s share of national income has been on the rise – a direct reflection of the decline in manufacturing and expansion in services.

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That has meant greater regional balance as well: The coastal provinces, which produce more than 85% of the country’s exports, are experiencing the most pronounced slowdown, while inland provinces have maintained relatively high growth rates. As a result, China’s Gini coefficient (a 100-point index of inequality, in which zero signifies absolute equality and one absolute inequality) fell to 0.50 in 2012, from 0.52 in 2010.

Two principal factors are driving this shift. The first is the decline in global demand in the wake of the 2008 financial crisis, which has forced China to adjust its growth model sooner than anticipated. The second is China’s ongoing demographic transformation. The share of working-age people (16-65 years old) in the total population has been declining since its 2010 peak of 72%. And the absolute number of working-age people has been falling since 2012.

At the same time, China is undergoing rapid urbanization, with some 200 million people having left the agricultural sector in 2001-2008 to seek urban manufacturing jobs. More recently, however, the pace of migration has slowed substantially, with rural areas retaining 35% of China’s total labour force.

All of this implies lower growth rates for China – though perhaps not as low as the 6-7% rates that economists like Liu Shijing and Cai Fang are predicting for the next decade. In fact, relying on China’s past growth record to predict future performance is inherently problematic, owing not only to important shifts in the labour force, but also to the fact that the speed and scale of China’s pre-2008 growth was unprecedented.

For starters, it is likely that the contribution to output growth of the rising ratio of working-age people prior to 2010 was overestimated. That makes the subsequent decline in the ratio an inaccurate measure with which to determine the negative impact on economic performance.

Moreover, this approach neglects the educational dividends that China will enjoy over the next 20 years, as the younger generation replaces older workers. As it stands, the rate of return-adjusted educational attainment for Chinese aged 50-60 is half that of those aged 20-25. In other words, young workers will be twice as productive as those entering retirement.

Indeed, the level of educational attainment in China continues to improve. By 2020, the share of those aged 18-22 who are pursuing a college education will reach 40%, compared to 32% today. This improvement in human capital is bound to offset, to some extent, the net loss of labour.

Furthermore, China’s low retirement age – 50 for women and 60 for men – provides policy-makers with considerable room to manoeuvre. Increasing the retirement age by just a half-year for each of the next 10 years would more than compensate for the annual decline in the labour force, which is projected to be 2.5 million workers during this period.

Other trends are boosting China’s prospects further. Though investment is likely to decline as a share of GDP, it will probably take a decade for it to dip below 40% – still robust by international standards. Meanwhile, the capital stock can maintain a reasonable growth rate.

Finally, China’s capacity for innovation is improving steadily, owing to rapidly increasing human capital and rising investment in research and development. By next year, Chinese R&D expenditure, at 2.2% of GDP, will be closing in on advanced-country levels.

Based on these trends – and assuming a constant labour-participation rate – China’s potential growth rate over the next decade is likely to hover around 6.9-7.6%, averaging 7.27%. This may be much lower than the 9.4% average growth rate in 1988-2013, but it is more than adequate by global standards. If this is China’s “new normal”, it would still be the envy of the rest of the world.

Source: World Economic Forum
Published in collaboration with Project Syndicate.

Author: Yao Yang is dean of the National School of Development and director of the China Centre for Economic Research at Peking University.

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Moderate pace of output growth sustained in September

“The HSBC China Manufacturing PMI rose to 50.5 in the flash reading for September, up from the final reading of 50.2 in August. The picture is mixed, with new orders and new export orders registering some improvement.”

pmi sept 1

Meanwhile, the employment index declined further and disinflationary pressure intensified. Economic activity in the manufacturing sector showed signs of stabilization in September. However, overall the data still point to modest expansion. The property downturn remains the biggest downside risk to growth. We continue to expect more monetary easing from the PBoC in order to steady the recovery.”

 

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pmi sept 4

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Three new “engines of growth” to watch in China

China’s plan to spread the wealth of coastal cities into poorer interior regions is starting to pick up speed, with better transport infrastructure in particular likely to accelerate the process, according to HSBC Global Research.

While China’s coastal regions have seen breakneck growth – the nominal GDP of seven coastal provinces has increased nearly 200 times since 1978 – its vast inland areas, remote and undeveloped, have lagged behind. Per capita income in the coastal regions of China is twice as high as in inland provinces.

That disparity is now working to the inland provinces’ advantage, says HSBC in its note, China – growth spreads inland. Rising input costs have pushed manufacturers to find cheaper production bases; while some have moved to developing Asian countries, many are shifting inland.

The process is being hastened by government policy. The recent announcement of three “regional integration plans” shows how the focus of development has shifted to the interior, HSBC said. In the short term, it reckons, growth in these areas will be fuelled by increased migration and infrastructure upgrades; longer term, it will rely more heavily on supply side factors: labour, capital and technology.

China has been seeking to share the wealth of the coastal cities with poorer inland parts of the country for 15 years.This strategy has now received renewed impetus with the announcement of three regional integration plans designed to make growth more balanced.

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The plan for Beijing, Tianjin, Hebei – or Jing-Jin-Ji, an abbreviation of the Chinese names of those places, as it is known – aims to spread Beijing’s wealth to neighbouring areas. The hope is that this will ease overcrowding in Beijing and Tianjin, a big wealthy port city, while pushing up growth in Hebei, a relatively poor province known for heavy industry.

Progress had been made on several fronts, said HSBC, foremost among them the development of transport: more frequent, high speed trains and new highways. Beijing’s seventh ring road, due to be finished next year, would run through a number of Hebei cities. A second Beijing airport is also being built in Hebei.

HSB-China

Source: CEIC, HSBC.

Some leading state-owned enterprises are being asked to move to Hebei. In June, it was announced that the three areas’ customs procedures were being integrated, easing the flow of goods.

Obstacles included uneven distribution of public resources and wage disparities – with Hebei being the loser in most cases – but:

We think the Jing-Jin-Ji area has the potential to become the most prosperous region in northern China, with Beijing and Tianjin devoted to the services sector and high-end manufacturing, and Hebei being the backyard workshop.

A second region under development is the New Silk Road economic belt, a revitalised version of the ancient trade route from China to Europe, which in China will involve nine provinces, five in the north-west and four in the south-east – an area that covers more than a third of the country.silk

The area’s biggest challenge, according to HSBC, is weak economic links between these regions. Despite government infrastructure projects, the area has underperformed: while its share of FDI was 18 per cent of the national total in 2013, its share of exports was only 5 per cent.

The area had comparatively low wage costs and land prices, however. In the next couple of years it would remain the focus of the central government’s investment in transport construction. Multiple pipeline are under construction and HSBC estimates that by 2020 natural gas imported from central Asia will constitute 40 per cent of China’s natural gas supply.

Related infrastructure projects as well as the construction of natural gas pipelines will support strong investment growth. Real GDP growth in this region will remain well above the national average and the gap with the coastal provinces will gradually narrow.

A third economic zone covers 11 provinces along the Yangtze River Delta, including Shanghai. River shippings’ comparative low costs, along with a cheap and plentiful labour force and a decent transport system make cities along the river ripe for investment.

YangtzeThe region has big economic disparities across its region: some highly industrialised, other left behind.

Other problems included disparities in social welfare benefits and business environments, which would hold back the free flow of labour and resources, and air and water pollution.

Still:

Given all the advantages – strategic location, river transport and a strong industrial base to build on – we believe this economic zone will become the second most prosperous regional cluster in China, second only to the coastal regions.

In the past five years average GDP growth in most of the provinces in this region was above 12%. And by 2020 we think this area’s output should easily exceed 50% of the national total. Compared to other regional clusters, the process of moving industries should be smoother as many cities like Wuhan and Chongqing already have a good manufacturing base.

HSBC said that across all regions the government needed to facilitate the free movement of labour and capital: the recent reform of the household registration system, which gives migrant workers similar rights to urban residents was “a significant breakthrough”.

Another important development is the move to make social welfare benefits more equitable throughout the country. These are important elements of the forces helping to drive sustainable growth in China.

Source: Financial Times
Posted on: Sep 18, 2014 5:18am by Mian Ridge

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Manufacturing In China Can Give Your Business The Competitive Advantage

When China opened itself up to the world twenty years ago, many realized how its huge market of almost 1.3 billion consumers could impact the biggest manufacturers and retailers in the world. Few anticipated, however, that China’s large population base would also provide competitive advantages against the most dominant players in the outsourcing industry.

China’s current outsourcing market is growing an estimated 30 percent annually, and many countries have relocated their headquarters to China to establish businesses. Manufacturing in China opens a world of possibility to create a wide range of products and innovations. In addition, bringing product manufacturing to China allows you to create a higher volume of product for reasonable cost. With a little research and sourcing, you can build a partnership to manufacture your latest product invention. If your competitors successfully outsource manufacturing in China, they can offer prices to your customers that are 30 percent to 50 percent less than they are currently paying.

The most important lesson: there is no shortcut to success in working with Chinese business partners. China is a country where anything is possible — but nothing is easy. Understanding the business culture, getting all your business disciplines intimately involved in your manufacturing operations there, and mastering the details are the prongs of a winning approach.

Here are four key points to consider:

1. Business Culture: Face the Differences

Despite the fact that China has modernized a great deal over the last 25 years, it can still be difficult to understand for an American doing business there for the first time. The same fundamental differences between American and Chinese business culture still exist. Understanding and accommodating those cultural differences is essential. One example is that business in China is based on relationships — as opposed to the US where business is a transaction based and primarily focuses on economics. That doesn’t mean that economics aren’t important. It means that collaborating closely with a Chinese partner like a factory owner on the details of a mutually beneficial business model can come only after the other party knows and trusts you.

Another example is that entertaining is a critical part of the overall business culture, and it is very important that you be prepared to spend time developing your personal relationship with the factory owner — often at his luxurious home that is located within the walls of the factory.

A final example: communication style. Americans tend to be outspoken, looking to cut to the chase and look for resolution. They style of many Chinese business people is to be quiet and reserved in meetings, so that you need multiple sessions with them to get the information you seek.

2. Make the Time Commitment

Companies sourcing product from China can control their own destiny if they commit to establishing and nurturing deep working relationships. Whether you establish your own organization in China or you use third-party providers, it is critical that the Chinese manufacturer believes you are “all in” at all levels in your company, particularly at the highest level. If they sense you aren’t all in, they will not maintain the high level of scrutiny on quality control, safety issues, and performance needed to prevent mistakes and drive quality and on-time production. That will cost you money and potential harm to your company’s reputation.

3. Sweat the Details with Your Partner

Producing in China proves the old saying “The squeaky wheel gets the grease.” Chinese factories pay the most attention to customers who spend the most time working closely with them — on issues ranging from sample making, purchase order placement, production planning and scheduling, quality control, and shipping performance.

Best practices would indicate that having a team of at least three people working directly with the factory on a daily basis produce the best results:

A logistics person focusing on purchase orders and shipments
A product person focused on the design of the product and packaging requirements
A quality control person making sure that the product was being produced to proper standards
If you get your top team closely involved, you will be much more in control, and you won’t be inclined to blame the factory when the finished product isn’t on the retailers’ shelves. As far as your customer is concerned, you are the factory.

4. Overcoming Problems

Even with all the cultural understanding and time and financial commitment, there will be problems to be dealt with. Long-term relationships and a group of dedicated factory partners are critical to building and maintain a successful outsourcing operation.

The bottom line is: your sincere commitment to work respectfully with your Chinese suppliers as a trusted partner — not as a disposable source of low-cost labor — will help you identify and solve problems. Remember, in China anything is possible but nothing is easy.

Source: Forbes
Published by: Michael Evans 02/07/2014

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A better apporach to China’s Markets

Creating a powerful emerging-market strategy has moved to the top of the growth agendas of many multinational companies, and for good reason: in 15 years’ time, 57 percent of the nearly one billion households with earnings greater than $20,0001 a year will live in the developing world. Seven emerging economies—China, India, Brazil, Mexico, Russia, Turkey, and Indonesia—are expected to contribute about 45 percent of global GDP growth in the coming decade. Emerging markets will represent an even larger share of the growth in product categories, such as automobiles, that are highly mature in developed economies.

Figures like these create a real sense of urgency among many multinationals, which recognize that they aren’t currently tapping into those growth opportunities with sufficient speed or scale. Even China, forecast to create over half of all GDP growth in those seven developing economies, remains a relatively small market for most multinational corporations—5 to 10 percent of global sales; often less in profits.
As developing economies become increasingly diverse and competitive, multinationals will need strategic approaches to understand such variance within countries and to concentrate resources on the most promising submarkets—perhaps 20, 30, or 40 different ones within a country. Of course, most leading corporations have learned to address different markets in Europe and the United States. But in the emerging world, there is a compelling case for learning the ropes much faster than most companies feel comfortable doing.

The appropriate strategic approach will depend on the characteristics of a national market (including its stage of urbanization), as well as a company’s size, position, and aspirations in it. In this article, we explore in detail a “city cluster” approach, which targets groups of relatively homogenous, fast-growing cities in China.

Targeting the right city clusters in China

By segmenting Chinese cities according to such factors as industry structure, demographics, scale, geographic proximity, and consumer characteristics, the Mc Kinsey group identified 22 city clusters, each homogenous enough to be considered one market for strategic decision making (Exhibit 1). Prioritizing several clusters or sequencing the order in which they are targeted can help a company boost the effectiveness of its distribution networks, supply chains, sales forces, and media and marketing strategies.

Exhibit 1

A recent analysis of China revealed 22 distinct urban clusters.

Chinese Cluesters

More specifically, this approach can help companies to address opportunities in attractive smaller cities cost effectively and to spot opportunities for, among other things, expanding within rather than across clusters (Exhibit 2)—a strategy that requires a less complex supply chain and fewer partners. Companies that nonetheless want to expand across clusters may find it easier to target 50 to 100 similar cities within four or five big clusters than cities that theoretically offer the same market opportunity but are dispersed widely across the country.

Exhibit 2

chinese clusters size

Clusters vary considerably in their share of urban GDP and in the relative importance of their hub cities.
Another major benefit of concentrating resources on certain clusters is the opportunity to exploit scale and network effects that stimulate faster, more profitable growth. Because most brands still have a relatively short history in China, for example, word of mouth plays a much greater role there than it does in developed economies. By focusing on attaining substantial market share in a cluster, a brand can unleash a virtuous cycle: once it reaches a tipping point there—usually at least a 10 to 15 percent market share—its reputation is quickly boosted by word of mouth from additional users, helping it to win yet more market share without necessarily spending more on marketing.

 

Source: Mc Kinsey Insights

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