Ausbuy

China - The Economic Miracle. Can It Last?

July 22nd, 2007

There is no doubt that the last 10 years was, in economic terms, the decade of China. It has recorded double digit growth, and in doing so, deservedly earned the title of the factory of the world. It almost single-handedly kept world inflation at bay. Multinationals either ordered their branded products from Chinese suppliers, or established their own factories to manufacture there. They utilitised an apparently endless stream of eager and smart workers who were prepared to work hard for very low wages, and work the antisocial hours required by a modern factory. These factories use some of the most modern machinery available. The combination of treble shifts, low paid, hard working labour and modern production technology, have resulted in prices for manufactured goods that the rest of the world cannot match.

The question is where to next? Many of the financial commentators tell us that trend will continue into the foreseeable future, and with it, Australia’s mineral boom. I feel that we should look a little bit more closely at the situation. Factory owners in Guangdong province, and the area around Shanghai, have started to complain about labour shortages. Costs are on the rise with wages going up by approximately 15%. Foreign companies operating in China are now being asked to pay various labour on-costs such as a 100% premium for overtime. These developments are significant, but with labour costs making up approximately 20% of most items, a 100% labour cost increase would add only 2% to the final cost. There are other more important problems on the horizon which we will now look at:

• China has benefited from an undervalued currency, but is now under pressure to revalue it. A 10% change in currency parity with the US$ would have a significant effect on China’s export of manufactured goods.
• China does not have a quality mentality. They are capable of producing high class products, but recent events such as exporting foods containing traces of banned pesticides, toxic blankets etc. show that standards can be variable.
• Until recently China was communist, and still does not have a clear legal system and an independent judiciary. As business inevitably grows, more complicated governance issues are going to become important.
• The gap between the rural poor and the affluent urban class is growing fast, and with it is the potential for labour and political strife.

Part of the problem is the sheer size and complexity of China. It cannot continue indefinitely under the centralised economic control of the Communist Party. The question is how the necessary changes can take place without unrest tipping over into political instability.

As you can see we have valid concerns. Despite these concerns we are very aware of the growing importance and size of China. It simply cannot be ignored, but there may be hiccups along the road to the position in the world where China appears to be inevitably heading. As its cost structure increases, much of its export market may be diverted to even lower wage countries, such as Vietnam and Cambodia. Inevitably China will adjust to this and move its exports higher up the value chain, but this will be slow. They may at this time divert some of their vast savings into building much needed infrastructure. If so, corruption will have to be rigorously controlled.

In conclusion I would suggest that developments in China be monitored, and political events both at home and overseas carefully analysed. China will march to the beat of its own drum, and a small country like Australia must be alert to developments which could adversely impact on our economy. The miracle cannot last, but we can adjust to reality. In the meantime, make the most of the good times.

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3 Comments »

1. The world is facing a polution problem and the main source is China. We are part of the problem as we are selling them coal and minerals. Surely we should ask them to clean up their act. We all live in the same world and we can’t say we are not part of the problem if we get rich selling to China.

   Comment by sceptic — August 10, 2007 @ 3:21 pm

2. Whether we like it or not our future is bound to China. As the factory for the world they will be our most important market into the foreseeable future. We are a medium sized resource rich economy but we need China more that they need us. It is rubbish to think that we can impose values on them.

   Comment by wiseguy — August 10, 2007 @ 3:35 pm

3. We shouldn’t ignore human rights because we have China as our major trade partner.

   Comment by Gami — August 10, 2007 @ 3:52 pm

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