China's Competitiveness
13.09.2004
China Business Summit 2004
A fierce global competitor for investment and jobs, China's own competitiveness and that of its corporations leave a lot to be desired. Corruption, poor logistics and a tottering financial sector offset the advantages of China's massive labour force. Though the factories that foreign investors build in China are world class, China's own companies will have to learn the kind of marketing and organizational skills that don't roll off a production line.
From a macroeconomic perspective, China appears to be in good shape, said Augusto Lopez-Claros, Chief Economist and Director, Global Competitiveness Programme, World Economic Forum. Strong growth has created a domestic import demand that has enabled China to enter the global economy without creating the kind of severe trade imbalances Japan did in the 1980s.
But China needs to undertake major improvements to remove constraints to its future competitiveness, Lopez-Claros said. China needs to strengthen its property rights and the independence of its judiciary. Crime and corruption stand alongside poor accounting standards and weak financial institutions as impediments that should be removed. And while China is a major manufacturer of high-tech products, he said, it needs to accelerate its own adoption of technology.
Whatever the government does will have to go beyond simple monetary policy measures, said Lopez-Claros. The interest rate mechanisms under government control are inadequate in reining in credit growth and the economy. So in addition to these levers, officials should strive to overhaul institutions, he said, boosting efficiency and reducing barriers to entry in the business sector.
China's government, Lopez-Claros said, needs to stop running fiscal deficits and instead save money to invest in a public pension scheme that can cushion the impact of rising unemployment and massive layoffs as state-owned enterprises restructure. It should reform the financial sector to reduce the dominance of state-owned banks that fail to charge interest rates that reflect the real capital risks of lending, he commented.
China enjoys great competitiveness in certain areas such as light industry, said Andy Xie Guozhong, Managing Director, Morgan Stanley Dean Witter Asia, Hong Kong SAR. But in some ways, China is reminiscent of Indonesia before the Asian financial crisis, riddled with inefficiencies that sap its overall competitiveness and that derive from deep and potentially intractable social and systemic problems.
China has not demonstrated the ability to create the specialized divisions of labour that characterize Japan's manufacturing success, Xie observed, nor has it mastered the intangible added value that imbues European goods with "luxury", nor the organizational prowess that makes Anglo-Saxon economies the masters of logistics, he said. As a result, China has yet to create global companies or brands. "If you want to create global brands, you must be able to manage a large organization that can innovate and achieve superior quality," Xie said. For China, he said, "it's an uphill struggle."
Providing enough jobs for its people represent a mammoth task for China's government, said Phillip Beniac, Vice-President, Asia Pacific, SAS Institute, Australia. The government will need to implement policies that encourage industries to use resources more efficiently if China is to become a global competitor.
"This is going to be the world's most intensely competitive battleground for enterprises," said John W. Egan, Vice-President, Global Services and Strategy, and Managing Director, Greater China, A.T. Kearney, USA. To compete with foreign companies - even in their own market - Chinese companies need to see improvement in several areas. Logistics costs, for example, remain a greater relative proportion of total costs in China than in a typical Western economy. China's services sector lags India's and needs improvement. More importantly, Chinese companies need to master the art of marketing, a feat they might be able to accomplish more quickly by acquiring companies overseas that already have marketing skills.