Made in China (Pt 2) - Economic transformation and potential benefits for Jamaica
Christopher Tufton, Contributor
The statement on the perimeter wall demarcating the zoned area for a proposed science and technology park south of Beijing was consistent with the message being transmitted by Chinese technocrats and business leaders. It read, "Transition from made in China to created in China."
In other words, China's economic strategy had to be adjusted beyond being a source for contract manufacturing for known Western brands, targeting primarily Western markets, to becoming a creator of its own brands, targeting its large and increasingly affluent Chinese market.
Many agree that the pace of this strategy adjustment may have been hastened by the global recession in recent years, which has seen China's annual growth rate cool to under eight per cent this year, triggered by a fall-off in demand from its traditional trading partners in North America and Europe.
In addition, China's currency adjustment against the United States dollar has seen cost of production going up and a gradual erosion in its global competitiveness in certain areas. Still, others argue that the Chinese authorities have been methodical in their approach to date, with structural and economic reforms, and their strategy to target the global marketplace with their manufactured goods.
Now that China can afford to create and expand its research and innovative capacity, the next phase of its development is to move up the value chain, innovating its own brands and competing globally.
Recall that in the 1980s, the strategy was about attracting investments for manufacturing and re-exporting. This was done primarily through the establishment of exclusive economic zones, the first set established in 1979. These economic zones were equipped with the critical infrastructure, and foreign investors offered tax incentives to locate in these areas to take advantage of overall lower-cost production processes and the ability to repatriate their profits to their country of origin.
STRATEGY YIELDED RESULTS
In 2011, there were 130 such economic zones across China, featuring high-tech, export processing and free trade agreements. These economic zones represented a practical response to China's approach to addressing its employment and foreign-exchange shortage challenge.
Over time, this strategy would facilitate China becoming a major manufacturing and trading nation, creating a revenue stream that has substantially improved that country's terms of trade, while expanding the job prospects for Chinese citizens.
At the end of 2011, China produced and consumed enough to be ranked the second-largest trading country in the world, with total trade value of US$3.64 trillion; exports at US$1.9 trillion, and imports approximating US$1.7 trillion. In the 1970s, China struggled to find foreign exchange for its import needs, but today that struggle is how to manage its massive US-dollar international reserves, valued in 2011 at approximately US$3.2 trillion.
In addition, foreign direct investment (FDI) has continued to flock to that country, establishing a presence in a market offering both a manufacturing and service platform for its growing, affluent internal market, while servicing the region and the world. In 2011, China was host to more than 71,000 FDI enterprises with a value of more than US$1 trillion, including 480 of the top 500 multinational enterprises, 1,200 FDI research and development centres, and more than 40 regional FDI-related headquarters. To facilitate this investment and trade environment, China joined the World Trade Organisation (WTO) in 2001, and in the process adjusted hundreds of laws to facilitate compliance with WTO rules.
These decisions brought significant benefits to the Chinese population. In 1980, GDP per capita was US$200. In 2010, it reached US$3,000, and in 2011, GDP per capita stood at US$5,000. In fact, the Chinese economy has doubled on average every seven to eight years over the last 30 years, with projections suggesting that by the end of the next decade, if growth in that country continues at seven to eight per cent, GDP per capita will reach US$10,000.
However, even with these impressive results, China remains a developing country with many challenges. These include the pace and equitable distribution of urban versus rural incomes, and the uneven development taking place in the east versus western China.
Chinese citizens have also become more sensitive to environmentally unfriendly industrialisation and are becoming increasingly vocal against such forms of economic activity. This is a situation which the authorities seem sensitive to and must manage carefully over the next decade to avoid levels of discontent that could erode its economic gains. The disparity in income levels must be a particularly concern for the authorities.
There are many very wealthy Chinese and many more poor ones. Only this past month, the 2012 China Rich List published by Forbes Magazine indicated that even though the total wealth of China's top 100 wealthiest individuals fell by seven per cent, partly because of the recession, these personalities still had a combined wealth of US$220 billion. The report indicated that there are currently 113 billionaires in China. Other sources estimate that the country boasts more than one million millionaires.
ADJUSTING TO CHANGE
On the positive side, this points to an increasing upper and middle class in China which will demand and can afford high-value goods and services. Already, there are manifestations of this demand. There is hardly a luxury consumer good or service that is not available in mainland China.
Visits to all the major cities will confirm economic progress, manifested in massive construction of critical infrastructure and real estate, well-lit streets and buildings, more cars replacing bicycles, beautiful architecture, and a nightlife that is ongoing. From branded jewellery to clothing, high-priced apartments to personal banking, China's urban centres are abuzz with activities, from its relatively recent acquired wealth.
The Chinese authorities understand this and are seeking to use this increasing affluence and demand to drive its continued economic expansion in a more self-sustaining way, by using its internal innovation to create a value chain of goods and services for its people and, eventually, for the world.
So a number of science and technology parks are being constructed and university programmes and infrastructure upgraded to encourage internal innovation for new products and processes.
All this is not to suggest that China will cease being a contract manufacturer for the rest of the world anytime soon. Given China's population and still underdeveloped regions, the country will continue to offer the opportunity for a low-cost platform for manufacturing goods. At the same time, however, China's innovative capacity is likely to improve and expand new product development activities.
EXPANDING OUTWARD INVESTMENT
Another strategic focus of the Chinese authorities is to encourage outward investments by Chinese companies. The Government seems to understand that given China's massive US-dollar reserves and the need to internationalise Chinese companies as part of its growth and globalisation strategy, greater effort needs to be focused on pushing local companies to go overseas. So far, this has taken the form of government-to-government agreements for infrastructure projects financed by Chinese funds and implemented by Chinese companies.
To support this thrust, China has engaged countries around the world, including Jamaica and other Caribbean nations, in areas of trade, investment promotion, and double-taxation agreements. The last Caribbean-China investment forum was held in Trinidad in September 2011, where many Chinese and regional companies and government representatives explored possible investment opportunities.
This collaboration is already producing results. In 2011, China's trade with the Caribbean stood at US$8 billion, an increase of 17 per cent over 2010, with US$5.77 billion representing exports and US$2.77 billion imports. This trend is likely to continue, particularly as the countries in the region continue to struggle to find economic solutions to overcome their debt-burden and job-creation needs, and view China as one of the few options they have for stimulating economic activities.
Opportunities abound for doing business with China. However, countries like Jamaica should be more strategic in their approach to building a long-term and mutually beneficial relationship with that country.
We have to determine our long-term interests and how these can be aligned with China's strategic outlook. This process must include an understanding of China's culture. In China, relationships that facilitate trust are more important than a contract. Jamaica must invest more time and effort in understanding the business culture of the Chinese investor.
This is a challenge that the Chinese authorities seem to be confronting with their own nationals seeking to invest abroad, who also need to invest more time in understanding their host country's cultural dynamics. For example, a major source of concern by host countries to Chinese investment in the developing world is the extent to which locals versus Chinese workers are employed on these projects. Given the employment challenges of developing countries, the Chinese investor must be sensitive to that reality.
Similarly, while the current government-to-government investment projects have offered significant benefits to countries like Jamaica, there should be a greater push towards longer-term direct investments and partnerships with local companies. Over time, it is expected that more Chinese firms will become fully privatised and seek investment opportunities abroad. Private small and medium-size Chinese operations will become as anxious to internationalise as large mega players. This could facilitate opportunities for local expansion to tap into regional markets or niche opportunities targeting the Chinese market.
These opportunities require knowledge of the trends in the Chinese marketplace and how things will change over time. This should be the focus of our official presence, through our diplomatic presence in China, working with JAMPRO. Critical focus should be on investor matchmaking for longer-term investments, relationship building through two-way trade and investment missions, and trends and opportunities assessment and analysis of the Chinese market.
Dr Chris Tufton is a senator, opposition spokesman on foreign affairs and trade, and investments, and co-executive director of CaPRI. The views in this column do not necessarily represent those of the above-mentioned entities. Email feedback to email@example.com and firstname.lastname@example.org.