China’s Need for a Change

By Pau

Paper, Gunpowder, Compass.

These were great inventions from Ancient China that enabled advancement of the Chinese civilisation.

Paper allowed for the record of knowledge.
Gunpowder propelled countries to embark on a conquest over nations.
The Compass guided explorers to charter through new territory.

China was well-known for its cheap labour 2 years ago. From 2012 to 2016, China’s labour cost fell from an all-time high of 110.40 Index Points to a record low of 103.30 Index Point. This coupled with its massive population of 1.3 billion people attracted various companies to make capital out of its low operation cost and sheer market size. However, as its economic growth over the past few years declined, China is finding ways to increase its productivity and prevent the “middle-income trap”. (1)

Figure 1: China’s declining GDP Growth.
Source: IMF, WEO

 

THE BOOM

Under Deng Xiaoping’s leadership, China has experienced a rapid economic growth due to its transition from a centrally-planned economy to a market-based economy in 1978. The decentralisation of the Chinese economy paved way for the rise of private enterprises that were more market orientated and efficient than the previous state-owned enterprises. This also allowed large-scale from both domestic savings and foreign investment, resulting in rapid productivity growth.

 

 

Figure 2: China’s Inflow and Outflow of Foreign Direct Investment.

 

No doubt these reforms have enabled China to be ranked first in the Global Manufacturing Competitiveness Index[i].

Chinato reach its UN millennium development goal of halving extreme poverty. China accounted for more than three quarter of global poverty reduction between 1990 and 2005. [ii]Similarly, this development fuelled the ballooning of the Asian middle class that underpinned global economic convergence and a reduction of inequality between countries.[iii]

THE FALL

Despite all these success, China’s economic growth has slowed down in the recent years. (Figure 1) Besides the slowdown, China is also plagued with rising labour cost due to increasing minimum wage (Figure 3) and an aging population (Figure 4).

The labour cost for China has increased from the all-time low of 103.30 Index Point in 2016 to 104.80 Index Points in the third quarter of 2018.

 

Figure 3: China’s increasing minimum wage over the years
Source: Trading Economics.com | Ministry of Human Resource and Social Security[i]

 

 

 

Figure 4: China’s growing Aging Population[i]
Source: Statista

 

These challenges will require[i] if they wish to stay ahead of the curve or even overtake US as the number one economic powerhouse.

As such, the Chinese government has indicated its desire to move away from its current economic model of fast growth at any cost to more “smart” economic growth, which seeks to reduce reliance on energy-intensive industries and rely more on high-end technology and services.

However, there is still much work to do. China is ranked 24th out of 140 countries in its innovation capability and 26th out of 140 in its ICT adoption that and Global Competitiveness Index (GCI) according to the World Economic Forum. [ii]

 

INNOVATE or remain STAGNANT

Solow’s Growth Model suggests that that only technological progress can explain sustained growth and persistently rising living standards.
With this in mind, we see a greater reason why China is seeking to focus on new areas within the service sector, such as e-commerce and technology, as it is more likely to bring about growth than a cumbersome reform of traditional sectors that are mired in regulation and underproductive.

WHAT IS CHINA DOING?

China is already making the transition to becoming a new major centre for technology and innovation.

The Chinese government has also encouraged local firms to expand overseas, as indicated from China’s FDI outflow of US$13.73 billion in 2005 to US$ 216.42 billion in 2016.
[iii] E-commerce and tech-giants such as Alibaba, JD, Huawei and Xiaomi have already made significant progress by expanding overseas. [iv] In fact, 9 of the world’s top 20 tech giants are from China. We also see these initiatives from large scale projects such as the Belt-Road Initiative and the Greater Bay Area [v]

With all these initiatives, China aims to sustain its economic growth and prevent itself from going into a case of the “middle-income trap” while facing challenges such as Trade-War from the US,
It is also faced with a large government debt to GDP ratio that reached an all-time high of 47.60% in 2017.
The rate of its development will also depend on the willingness of the government to adopt an open market stance that will ease restrictions on FDIs and its effort to clamp down on intellectual property thefts.

In conclusion, much reliance will be dependent on its increasing pool of talents, and major firms such as Alibaba, JD and Tencent to pave the way for further innovation. With the progress that China is making, it is a matter of time before China becomes the leader in technology.

 

 

 

 

References:

  1. Bloomberg (2018): China built a global economy in 40 years. Now it has a new plan. Available at: https://www.bloomberg.com/news/features/2018-12-15/president-xi-jinping-s-next-moves-dictate-china-s-economic-future
    [Accessed on: 22 December 2018]

 

  1. [1] Deloitte (2016): 2016 Global Manufacturing Competitiveness Index.
    Available at: https://www2.deloitte.com/global/en/pages/manufacturing/articles/global-manufacturing-competitiveness-index.html
    [Accessed on: 22 December 2018]

 

  1. [1]UNDP (2015): China’s Success on Millennium Development Goals provides example for others to follow for the post-2015 development agenda, says new UNDP report.
    Available at: http://www.undp.org/content/undp/en/home/presscenter/articles/2015/02/17/china-s-success-on-millennium-development-goals-provides-an-example-for-others-to-follow-for-the-post-2015-development-agenda-says-new-undp-report0.html
    [Accessed on: 22 December 2018]

 

  1. [1]Johnathan, Eckart. (2016) World Economic Forum: 8 things you need to know about China’s economy. Available at: https://www.weforum.org/agenda/2016/06/8-facts-about-chinas-economy/ [Accessed on: 9 December. 2018]
  2. [1]Trading Economics: China Minimum Monthly Wage (online)

Available at : https://tradingeconomics.com/china/minimum-wages
[Accessed on: 22 December 2018]

 

 

  1. Statista: Age Distribution in China from 2007-2017 (online)
    Available at: [1]https://www.statista.com/statistics/270163/age-distribution-in-china/
    [Accessed on: 22 December 2018]

 

  1. [1]Morrison, Wayne M. (2018) China’s Economic Rise: History, Trends, Challenges, and Implications for the United States.
    Available at: https://fas.org/sgp/crs/row/RL33534.pdf
    [Accessed on: 22 December 2018]

 

 

  1. [1] World Economic Forum (2018) : The Global Competitiveness Report (2018)
    Available at: http://reports.weforum.org/global-competitiveness-report-2018/country-economy-profiles/#economy=CHN
    [Accessed on: 22 December 2018]

 

 

 

  1. [1]World Bank (2018): Foreign Direct Investment, net outflows (% of GDP)
    Available at: https://data.worldbank.org/indicator/BM.KLT.DINV.WD.GD.ZS?locations=CN
    [Accessed on: 22 December 2018]

 

  1. [1] Ethel, Jiang. (2018). GOLDMAN SACHS: Chinese tech giants are dominating North America in VC funding for the first time, and it could be the start of an unprecedented boom (BABA, BIDU, JD). Yahoo! Finance. Available at: https://sg.finance.yahoo.com/news/goldman-sachs-chinese-tech-giants-130200905.html [Accessed on: 22 December 2018].