“Where are those elderly people?” Kadir van Lohuizen, a Dutch Photojournalist kept on asking me this question during our visit to a Nokia factory in Dongguan, China. “They are not needed in this city.” I heard myself answered.
In Dongguan, a city that sits at the center of South China manufacturing zone, 90km north of Hong Kong, 75 percent of its 7million residents are migrants from all over the country. They are usually young, and they are diligent: Their spend days and days working in the factories producing for every corner of the globe. They are anonymous, but their names are all mixed into a “made in China” stamp.
Cities like Dongguan and Shenzhen, were forced to be open ports for trading after two opium wars in mid- 19th century that symbolized the beginning of modern Chinese history. In 1980s, they were ring fenced as “Special Economy Zone” by the Communism Party to test its economic reform and opening policies. In a 150 years time, these old trade ports returned to international traders’ attention as part of the global production chain. Chinese style low tech, labor intensive manufacturing lifted millions of Chinese people out of poverty and also boosted these cities along the coast. There, China not only trades final products and raw materials as 150 years ago, but also participates production on its own or in corporate with any other parts of the world.
Looking back to the China just coming out of a decade long devastating Cultural Revolution in 1976, it literally has nothing to lose. Its GDP per capita was $240 expressed in today’s price, while its neighbor Japan had $10,000 per head in 1970. It soon learnt to adopt the golden pattern that had boosted Japan and Asian Tigers: to develop a manufacturing-dominated, export-driven economy to take advantage of international trade.
Its huge population with very low income and relatively strong industrial base developed under Soviet model sent China onto a track of labor-intensive processing trade. But China also learnt to restructure its export composition in time: It has been shifting many less profitable industries such as textile to its poorer neighbors and managed to approach the end of many supply chains within East Asia. It also manages to expand industries that generate higher profits, such as steel, shipbuilding and machinery that already accounted for over 60 percent of China’s export in 2008. Its service sector also thrived on China’s role as major global suppliers and in turn repositioned China’s niche in the global economy. For example, the Hong Kong based Li& Fung group, developed from a conventional logistics company, now manages a sophisticated sourcing networks based on its expertise in mainland China to find suppliers of materials and manufacturers of products for global companies.
Japan and Korea had achieved similar proportional shift in 80S and late 90s respectively, but both took a longer time. In a highly competitive environment, the faster a national economy finds its niche in the global economy, the earlier and greater it enjoys benefits from its transition. In 2008, China overtakes Japan to be the number two in the world economy in term of GDP.
As trade is one of the biggest driving forces behind China’s two digits GDP growth rates in the past decade, the recent recession starting from world’s biggest economy has inevitably hit China’s export driven economy harshly. But the Chinese has learnt to prepare for rainy days even before it gets cloudy------it has already started diversifying its trade partners. In 2009, China has overtaken US and EU respectively to be Brazil and Africa’s first trade partner. When Chinese top leaders visited 9 countries in Central and Latin America at the beginning of 2009, its exports to this region had already raised ten fold in the last decade. In Brazil for instance, its exports in term of value soared 58 percent from 2007 to 2008 alone.
Besides consistent trade surplus, abundant foreign direct investment is the other main reason for China to sit on top of the world largest foreign reserve. China has long enjoyed a much higher level foreign direct investment poured into its economy than any other developing countries. Foreign investment has concentrated in labor-intensive manufacturing at early stage, and then moved into property and financial sector such as security and credit markets, especially after China’s accession to WTO.
Many indicators have shown that China is approaching where Japan has been: Continued capital and trade surplus, booming stock and property market, and high level of domestic savings. But is China heading for where Japan is now?
It is clear that in the near future, China will still continue its growth powered by its exports, the fact that China has faced the most dumping charges in the successive 12years to 2006 has again questioned market share left for the Chinese. Since its accession to WTO, China has gradually achieved most of its commitments in liberalizing its economy ranging from financial industry to textile sector, from Automobile making to agriculture. But as it is not fully open to the world economy as the currency is not convertible, its financial industry still has many constrains on foreign capitals and it is considered as a non-market economy by WTO, it still finds itself an awkward position in the world economy.
So is warming up relations with new trade partners, especially those with large amount of resources a solution for China? Large purchase of raw commodities from China can make people in African and Latin America wealthier to afford more Chinese goods which are price competitive anyways. It looks like a perfect circle, but not so much if to take two important facts in account: One, resources are not unlimited therefore, potentially expensive, and it can be a matter of security by Russia’s arbitrary cut of gas supplier in the last winter. Two, China may not even profit much from “made in China” products since the supply chain now gets really global. Essentially, China can only profit from the spread of export value minus import value, so if China continue to compete with its lower cost labor and massive production scale instead of searching for solution to increase the value that can be added on its export products, it will be washed out in competition sooner or later. There are always cheaper labors, and after the current generations of Chinese young labors current employed in manufacturing that were born after “one child policy”, number of its young labor is deemed to decrease vastly in the time being.
To pursue a high domestic consumption has been prescribed to China as it potentially has the world’s biggest market. However, it is easier to say than doing. While the massive stimulus plan launched at verge of financial crisis has shown the determination of the Chinese government, Chinese households tend to save than spending as most of them feel uncertain about the future, fear of rising housing prices, unemployment rates and lacking of competent social welfare system. In addition, Chinese companies joined savers' team by making higher profit and paying down debts. American style credit life is deemed as a bad thing from private to public (especially proved by the recent crisis), which then lower possibility to foster a consumption driven economy.
Together with high saving levels, China also faces potential problems caused by its world’s highest investment rate (40 percent according to IMF). High investment level itself is not necessary a problem. But when vast amount of the money gets into fields that create “feeling of wealth” more than driving economic growth in a real term, such as real estate sector and equity market, it is potentially dangerous as it has been proved that it could crash overnight. China is warned to watch out for burst of asset bubbles which have dragged Japan into recession in 1990s from which it is still struggling to get out. But at this stage, neither China’s stock nor property market is dangerously overvalued thanks to the low level of debt driven borrowing in this country.
However, danger still exists if the assets boom actually dries up capitals that otherwise can finance the real economy and therefore limits the efficient capital allocation. There are middle and small Chinese companies, mainly private owned are complaining of its access to the so called “cheap and free capital”, due to high requirements for bank loans and limited exposure to other financing. They are often the ones never get favored from any government’s gigantic stimulus plans. Inequality among individuals will pose threats to social stability, inequality and imbalance in capital allocation and unsustainable growth structure can also cause an economy to crash. Just hope that is not how China differs from Japan.
