How sustainable is Chinese advantage?
While world economy is facing the slowest ever growth prospect in over
two decades, China has acquired a magnetic attraction for investors for the size of its
domestic market for all types of goods from cars to modern telecommunication products and
computers. There seems to be a race among the Taiwanese, Japanese and western
manufacturers to set up manufactories in China to take advantage of low-cost
manufacturing. China offers a number of advantages to global competitors to meet the
emerging market challenges. A-grade infrastructure in the Special Economic Zones and other
industrial areas, a host of tax concessions, cheap labour and easily available skilled
manpower at 10-30 times lesser cost are all working to tilt the balance in Chinas
But the big question is how sustainable are the Chinese competitive
advantages in the long run? First of all,
Chinese statistics are exaggerated. No sooner the year 2000 closed, China declared GDP
growth at 8 percent, whereas independent analysts observe that the actual could have been
6-6.5 percent. Local chieftains want to show their regions attractive for investors and
thus cook the books. Chinese economy this year is supposed to have been performing
robustly. But a major pump priming by the government will add substantially to the
expected 7.5-8 percent GDP growth. This may however create fiscal problems, if the pump
runs longer. Just released official data suggests that the export growth in first seven
months of 2001 has slowed down to 8.4 percent from 27.8 percent last year. Exports are
important, as they constitute a quarter of the Chinese GDP. Chinas entry in WTO may
further impact the export competitiveness, as many of the tax incentives for export goods
China is yet to adopt rules and regulations of a free-market economy.
Local companies like Huawei, Legend and Haier have received favourable treatments at the
cost of foreign companies who entered the Chinese market with inflated hopes. Many Chinese
state enterprises (SEs) have been lying closed or are on verge of closure for lack of
orders. These companies, supported by bank funds are ready to manufacture at a loss, just
to survive and keep workers on the rolls. Bad loans from the banks are mounting and size
of non-performing assets (NPAs) is estimated to be $200-300 billions. Banking operations
are kept under wraps, so that murky dealings are not exposed. Bank managers operate under
directions from the local communist bosses to lend money to projects/enterprises whose
long-term viability is questionable.
Labour regulations are lax and workers in many industries have to toil
for longer hours. Working conditions are also tough, as workers stay in crammed
dormitories inside the industrial zones, to work from 8AM to 8PM. They are not allowed to
form their own associations at the national or regional level. This advantage however may
not last long as workers become conscious of their rights. Even though labour issues are
not raised at the WTO, such abusive practices could come under attack.
Then there are accounting juggleries. China is new to the western style
accounting practices and there is a huge shortage of trained accountants. There is stiff
competition amongst the SEs to capture market share leading to gross undercutting in costs
to sell in the international market. Corporate governance too is a high casualty, as
transactions are not transparent and managers of SEs indulge in various irregularities by
siphoning-off funds offshore, which in many cases comes back disguised as FDI. Chinese
capital markets are underdeveloped. Their regulations are not in tune with those in
free-market economies. Foreign investors can invest in B-group shares only at Shanghai and
Shenzhen exchanges and cannot indulge in trading in A-group shares meant for locals.
Market has thus been regimented to provide artificial boost to the bourses. Bull-run in
B-shares, which rose by 200% in past one year is coming to close. Some Chinese banks lent
money to securities firms illegally, which was invested in the stock market on banks
behalf. Stocks therefore remain volatile and subject to insider trading.
Political risk in China cant be ignored. Chinas entry in
WTO will call for large scale restructuring in their domestic market regulations and
practices, which currently do not allow free operations throughout China. An acceptable
level of legal infrastructure will be necessary to adjudicate disputes to inculcate a
sense of confidence and legal predictability.
Hence summary judgment on permanent competitive advantages will have to
be held back, till China demonstrates real determination and will power to establish a
free-market economy in a free society. Chinese leadership will be under tremendous
pressure from various quarters to perform and create sustainable advantages for China
through a consistent reformist agenda.