The key to the latest (12th) 5 year plan is the reduction in the target for economic growth for China. It's been reined in again to 7% underlying government concerns that runaway growth is causing damage to the stability of Chinese society. Optimists have already noted that this long-term reduction of targets hasn't actually prevented the country from exceeding those targets anyway.
However while this may be true in the short-term there are some serious warning signs on the horizon.
The World's Manufacturer
China may have succeeded in becoming the factory and production base for the world, but this success has impacted on local wages. In fact Chinese workers have benefited from massive wage inflation over the last few years, and while this may not seem substantial to their counterparts in the west, locals are now among the best paid in the region.
Which is not good news for the low-end "pile it high, sell it cheap" producers. It's likely that over the next 5 years China will start to lose this business, as it becomes cheaper to use other countries in the region for unskilled labour and other emerging states like Bangladesh.
Food and Housing Costs
There's also going to be some serious inflation of the cost of basic resources, with China facing its worst drought in 60 years it's very likely that basic staple foods are going to increase dramatically in price. This means that the internal economy which is already fragile compared to developed nations may be at risk as more of a worker's budget goes on necessities than ever before.
To make matters worse rents and costs of ownership in China for housing are also spiralling upwards, with an unending pressure for rural workers to be able to migrate to cities this isn't likely to slow down any time soon. And again this takes money away from the internal economy.
So where are the opportunities?
China is now faced with similar problems to Japan in the 70's. And similar solutions may enable China to make the final move to world economic giant.
Quality Industries and High Tech
Japan pulled itself out of economic stagnation by moving the economic focus from cheap mass produced products to high quality production. China must now have its own "Kaizen" or "TQM" style revolution by building on what is now a semi-skilled production base and enabling it to become highly skilled. This will justify the increased wages and ensure greater profit margins in the future, and make the economy better positioned for the inevitable exodus of low end manufacturing.
While Japan completed its quality revolution before moving on to become a high technology provider, China will almost certainly have to undergo this in parallel. With enormous investment earmarked for new and existing technologies that are perceived as high value. The challenges will include turning the "new energy" sector into a viable, reliable and cost-efficient alternative to existing fuels. Ensuring that China's automotive sector becomes an efficient exporter to match the successes it has had within its own borders. And making better use of fossil fuels which are an essential part of continuing growth until such a time as new energy can take up the slack, particularly in terms of implementing low power technologies such as LED in new city developments.
The Internal Economy
The other massive opportunity in China comes from enabling the Chinese to spend more at home. This is hugely problematic at the moment; locals tend to save much more than their Western equivalents despite much lower wages. They do this because there is no safety net built in their system, no health care, no state support or pensions for the elderly, etc.
But there is also a focus on buying cheap non-sustainable products with no service and support. This is an area that offers huge growth potential in transforming purchasing habits to high quality and high service products. It's not without risk as Best Buy discovered recently but it is a key to bringing cash flow to the economy.
There's much more to the 5 year plan than a headline rate for growth, but even that simple figure offers enormous opportunity to those willing to seize the day and work with China to bring sustained success.
No comments:
Post a Comment