What About China?

For some American manufacturers, the word “China” may still be synonymous with “cheap labor.” But given rapidly rising wage costs in China, many economists agree that change is in the works.

“Wage acceleration, I think, is part of a broader trend that suggests that China will no longer be the low-cost competitor in Asia,” said Cliff Waldman, global economist for the Manufacturers Alliance/MAPI, a business research organization based in Arlington, Va.

Waldman, who five years ago launched a China research program for the organization, discussed some of his views and conclusions on the Chinese economy during a Nov. 13 presentation in Chicago. The presentation was part of a day-long “Manufacturing Perspectives” event for the media that was sponsored by Rockwell Automation Inc., the Milwaukee-based controls and automation supplier.

Referring to China as “almost a metaphor for globalization, with all of the fears and opportunities therein,” Waldman covered both his short-term and long-term projections for China’s economy.

Among observations for the near term, Waldman noted that total investment in China is currently running at “unheard-of levels,” at about 40 percent of gross domestic product. “Are we in an investment bubble in China? That’s probably the most important question for the short term,” he told the audience.

Post-Olympic slowdown

Waldman pointed out, however, that the portion of investment that represents new building and processes, though still at double-digit levels, has slowed dramatically of late. “That tells me that we may be in the early stages of an investment slowdown in China,” he observed. His bottom line conclusion on investment: Though there are signs that total investment in China may be starting a decline, such slowing likely won’t begin in earnest until after the 2008 Olympics, scheduled for Aug. 8-24 in Beijing.

Beyond the short term, Waldman said that “three things, more than anything else, will shape the long-term architecture of the Chinese economy.” Those three things, he said, are the labor market and the path of wages; demographic issues; and “the emergence of the almighty consumer.”

On the labor front, Waldman noted that “nominal wage growth has been remarkable” in China, at about 14 percent in 2006. He added, though, that a significant geographic wage gap still exists, with much higher wages in urban than in rural areas. While wage growth has been accelerating greatly, employment growth has been weak in China, suggesting that productivity is quite high, Waldman said. Another big trend is rapid growth in higher education graduation levels. “The increasing importance of education in the Chinese labor market says that wages of educated and skilled workers will increase at an accelerating rate during the next decade,” Waldman predicted.

Labor shortages

虽然中国的world’s largest population, at 1.3 billion people, the country’s population growth slowed markedly between 1993 and 2006, Waldman said. This is due not only to the country’s one-child policy—which has been unevenly enforced—but also to the fact that economic growth creates more opportunities for women, he said, which reduces child bearing.

更重要的是,Waldman说的百分比China’s total population that is 65 years of age or older has climbed from about 6 percent in 2000 to 9 percent in 2006. “That is huge jump in six years, and it tells you that China has a very strong demographic issue to contend with,” Waldman said. “I don’t think today that China is yet in a state where population dynamics matter a great deal for growth,” he observed. But over the next decade, a drop in the percentage of the Chinese population that is working age means that “a declining labor supply is apt to be the most pressing issue,” he predicted. “China may be one of the few developing countries to grow old before it grows rich.”

Because older people save less, another implication of the demographic shift is that savings rates in China will decline, according to Waldman. This, combined with rising wages in the labor market will “create more of a consumer economy” in China, he said, while also creating a drag on capital inflow and foreign direct investment.

Consumers arise

China’s consumer economy is weak today, even by Asian standards, said Waldman. Household spending share of gross domestic product amounted to only about 35 percent in China is 2006, according to a graph shown by Waldman. In other emerging economies, such as India and Poland, the percentage totaled about 55 percent and about 60 percent respectively last year.

There are some signs in China, however, that “the consumer is going to come into power,” Waldman said. Among other things, the disparity in income distribution between rural and urban areas seems to be lessening, in part due to improved agricultural technology in the rural areas, which helps boost income. Also, food as a percentage of household expenditures is falling, particularly in urban households, which “tells me that the consumer is getting in better shape,” Waldman said. This and other factors is likely to lead to higher Chinese consumer spending power going forward.

Waldman noted that the process will be gradual. The full potential of the household sector will not be realized until China rebalances away from excessive investment growth, which will occur during a period of slower economic growth, according to Waldman. “It’s going to be a while, but the consumer is going to play a much bigger role in a decade or so,” he concluded.

Opportunities and risks

Waldman noted that the trends point to various opportunities for U.S. manufacturers doing business in China. His list includes environmental technology; medical technology; research and development related to computers, energy and infrastructure management; and a growing consumer culture. “These things summarize in my mind, what the big opportunities are down the line—not this year, but down the decades—for American manufacturers in China,” Waldman said.

But those opportunities won’t come without risks, he added. Waldman’s list of key risks of doing business in China includes environment and health issues; rising costs; intellectual property concerns; and rapid social and political changes.

Manufacturers Alliance/MAPI
www.mapi.net

Rockwell Automation Inc.
www.rockwellautomation.com