The Wheels Fall Off China's Boom (April 1, 2008)
Please note I am saying "the wheels fall off China's boom" not "off China." That distinction is important. If the Chinese government mishandles the economic/ financial bust which has just started, then the wheels could indeed fall off China, Inc.
I have posted here for years that factories have been moving from China to
Vietnam, Thailand and elsewhere. Now BusinessWeek confirms the trend:
China's Factory Blues
The bigger multinationals may be having second thoughts, too. A report by the American Chamber of Commerce in Shanghai found that more than half of foreign manufacturers in China believe the mainland is losing its competitive advantage over countries like Vietnam and India. Almost a fifth of the companies surveyed are considering relocating out of China. "The big story here is that globalization is for real—and China is no longer what it was," says Ronald Haddock, a vice-president at consultant Booz Allen Hamilton, which wrote the report.The process of abandoning factories in China is not terribly orderly: Rising costs forcing some South Korean factory owners to flee China
In Qingdao, Sung Jeung Han, manager of the Korean Society and Enterprise Association said 20 percent to 30 percent of the 6,000 South Korean firms in that eastern port city were losing money.It may seem anachronistic to place Chairman Mao in the cart with the shaky wheels, but I did so to illustrate that China's government retains the flawed structure of Mao's era on which new layers have been poorly grafted.
When the need arose to suppress protesting Tibetan monks, China's rulers quickly mobilized hundreds of thousands of regular Red Army troops and deployed them domestically. This centralized command-and-control reveals that the fundamental layer of China's government remains a Communist dictatorship ruled by a small oligarchy.
When SARS threatened to disrupt trade and the people's trust in their government, the central command-and-control structure quickly asserted itself on a national scale: no public spitting, etc. etc.
The structural problem is this: the economy is essentially controlled by local government, not the central government. When the economic reforms began in 1978, several key structural changes were made, the consequences of which are still playing out.
One was that regional and local governments were given control over economic development. Thus if a city government wants to build a huge sports arena/shopping complex, they can approve the construction without central Party or government approval.
This is the structural root of many of China's unsolvable problems such as corruption and industrial pollution. If a factory is spewing airborne lead into the air, the central government has the authority on paper to do whatever it wants, but in practice the enforcement of regulations is largely in the hands of local government: the very same government tasked with providing new jobs and enticing capitalists to build new facilities in their city/area.
Even stickier, the local officials wined and dined that factory owner to build there for the jobs, and the owners provide some level of "support" for the local Party officials. Perhaps not outright cash, but benefits nonetheless: influence, contracts, gifts, etc.
So now you the local official must go the factory owner, who you just sat next to the previous night at a banquet, sharing jokes and liquor, and you're supposed to tell him to buy a horrendously costly scrubber for his smokestack or you'll have to shut him down?
Structurally, that is simply untenable. This is the root of story after story in which the factory shuts down for a few days and then starts releasing the airborbe lead at night, when nobody can see it. That's the "solution" which works for the owner and for the local Party officials who are in some sense "co-owners," for if the factory shuts down or moves away, they lose.
Another structural reform was made which is now haunting China in a fundamental and pervasive way: who provides pensions and health insurance. Unfortunately, China's central government chose the same unstable formula the U.S. did way back when: make the employer responsible for employees' pensions and healthcare insurance.
This worked fine when the government owned 100% of the entire country; every factory and commune was essentially owned by the central government. But as the economic reforms took hold and the government began closing down or selling government-owned factories, then the workers began falling through the shredding safety net.
In other words: China does not have a centrally operated pension or healthcare system. Those workers whose employers survived the transition have pensions, those whose employers are gone do not.
Among our Chinese friends' parents, there is a great divide. Those who spent their lives working for a Party newspaper or bureaucracy or the Army receive a pension, and life is really pretty good. But those who worked for a factory which has closed have nothing.
This structural divide is precisely what is destroying the social contract and fabric in the U.S., where government workers and those who labored for surviving multinationals have pensions, while those who worked for firms which ultimately failed have nothing until they qualify for Social Security and Medicare.
China has plans to fund national pension and healthcare systems, but being horrendously expensive--recall China has 1.3 billion citizens, to the U.S.'s 300 million--those remain future plans.
Another structural problem (dare I call it a new form of dialectical materialism?) is inflation. The cost of food and rent is rising by leaps and bounds in China, and the central government's attempts to control prices by fiat have been largely counter-productive.
Trying to force prices lower in times of shortage is like trying to compress water: it doesn't work. Lower the price of electricity without lowering the input costs (coal) and you end up with electricity shortages.
Pave over thousands of hectares of prime rice land with high-rises and you get declining production. Divert water from agricultural producers to the Olympics and you get declining yields. Declining yields result in demand/supply imbalances and rising prices.
MSN commentator Jim Jubak foresees negative consequences of the upcoming Olympics--consequences which are to some degree reflections of the structural problems I outline above: China's looming Olympics disaster The Beijing games are supposed to showcase China's stature on the world stage. But they're producing protests at home and may shut down big hunks of the nation's economy. (Several readers recommended this link--thank you.)
Lastly, the idea that China could simply shift its manufacturing sales to Europe as the U.S. recession takes hold has been revealed as hope not reality. As BusinessWeek notes, Ireland--along with the rest of Europe--is suffering its own real estate bust and slowdown as factories close or move to cheaper climes: Ireland: The End of the Miracle The powerful euro has crushed the country's decade-long economic expansion—and its competitiveness
New correspondent J.S. offers an "on the ground" report from Shenzhen, China, on many of these issues. I asked J.S. to comment on rising prices, China's stock market decline and the reaction of average citizens to these unwelcome developments. Here is his report:
The real estate bubble in Shenzhen has started to deflate. Rents however seem to have only leveled off and not gone down noticeably. What I found troubling was how the rental increases seem to be squeezing the lower wage earners. My Chinese friends say their 1200 RMB per month apartment was 1000 before the last increase. Meanwhile the apartment I am renting went from 1900 to 2100 in a year. You can see how in percentage terms the increases are much greater for the cheaper and more affordable apartments.Thank you, J.S. for a deeply interesting report. For more background on China's challenges, please read China: An Interim Report (2005).
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