Do Economic Laws Apply in China?

February 5, 2018

 

Last month Bloomberg writer Michael Schuman asked an interesting question – is China exempt from the laws of economics?

 

He points to his long-held economic maxims. Firstly, history will always repeat itself. Secondly, “what doesn’t work, doesn’t work.” These have held true across nations and time, except in the case of modern China.

 

“The more I apply my rules of economics to China, the more they seem to go awry. China should be mired in meager growth, even gripped by financial crisis, according to my maxims. But obviously it’s not. In fact, much of what’s going on right now in that country runs counter to what we know—or think we know—about economics. Simply, if Beijing’s policymakers are right, then a lot of basic economic thinking is wrong—especially our certainty in the power of free markets, our ingrained bias against state intervention, and our ideas about fostering innovation and entrepreneurship.”

 

Schuman’s unwilling to change his viewpoints just yet, and we at Fulcrum would second this. While economics here certainly do have proverbial Chinese characteristics, there are already mechanisms in motion mirroring those familiar in other markets. Businesses looking to China, regardless of the industry or sector, would be wise to understand a few key dynamics.

 

Rising cost of labor in traditional industrial locations. As Shaun Rein points out in his book, The End of Cheap China, “…too many businesses underestimate how fast costs are rising in China and how rising costs won't change anytime soon.” The days of China being a cost play for business are very much over. Sure, you can still find fairly inexpensive labor in inland and western areas, but the capital investment necessary to get things up and running may be prohibitive. Where we’re seeing the biggest end to cheap China are in the traditional industrial centers of Shanghai, Guangdong, and Tianjin.

 

Labor costs for the average Chinese worker have increased 15 percent year on year since 2000 according to China Daily Asia. For migrant workers, wages have gone up an average of 10.3 percent annually since 2013. Lagging productivity growth in China, and converse gains in developed markets, make the total costs even higher. When factoring in productivity, the World Bank notes wages in China are only 4 percent lower than those in the United States.

 

Supply side economics are driving higher expectations. As the world’s factory, China developed a globally dominant export market. Now, it wants to shift the focus away from export manufacturing and towards domestic consumption. The impetus for this is largely due to China’s slowing economy and a rise in disposable income among the middle class. Along with Government policy measures, the move from manufacturing to consumption aims to sustain China’s economic growth for decades to come. It will also be the main driver towards service-oriented Chinese businesses and household income growth.

 

For businesses operating in China, this means your customers and partners will be looking for higher-quality goods and services. Customers are no longer chasing the lowest price. Now, they want to see the value in your product not just in monetary terms, but also in how it impacts their lives. Messaging, resource allocation, and employee training all need to match these changes in the market.

 

Xi Jinping's Robot Revolution. President Xi is also calling for a "robot revolution" to improve domestic productivity. China is freeing up billions of renminbi for technology upgrades and industrial robotics. Leaders are planning a dramatic increase in the country’s robot-to-worker ratio. China’s chief manufacturing center, Guangdong, announced a US$150 billion investment over three years to subsidize the sale of industrial robotics at 2,000 of the province’s largest manufacturers. The goal? Automate 80 percent of the province’s factories by 2020.

While much has already been written on the changing economic face of China, these three factors are among the most important, and often overlooked, for businesses here. In addition to supporting Government priorities and the China narrative, which we’ll discuss later this month, aligning operations with economic trends will help weather a dynamically changing market.

 

 

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