China weathered the global financial crisis of 2008-09 better than most countries, but the downturn still had a profound effect on its export-led economic model.
“China is run by engineers and planners. A financial crisis wasn’t in the plans,” James McGregor, senior counselor to APCO Worldwide (Beijing), told the annual Asia-Pacific Business Outlook Conference at the University of Southern California recently.
After 20 years of unprecedented growth as an export-led economy based on low labor costs, China’s exports plummeted when Europe and the U.S. went into recession. China is now developing a new model based on domestic consumption, with businesses driven by high technology and productivity.
U.S. investors, importers and exporters who attended the USC conference were advised to plan for a China where production is geared more for the domestic market than foreign markets.
China, however, will remain a manufacturing powerhouse as some export-oriented producers migrate from the coastal regions to the interior. Economic growth in the interior is running at about 15 percent a year, compared with 10 percent on the coast, said William Overholt, senior research fellow at Harvard University’s Kennedy School.
Some manufacturing, however, is leaving China for Vietnam and other countries where labor costs are much lower. Labor costs in China are increasing at more than 10 percent a year, said William Zarit, senior commercial officer at the U.S. Embassy in Beijing.
As a result, Chinese leaders are pushing the economy toward enterprises that are geared toward domestic consumption. Consumer spending by 2010 is expected to account for 50 percent of GDP, up from 35 percent today, Zarit said.
By 2020, almost half of China’s population will be considered middle class, up from 23 percent today. The rising middle class is better educated than the Chinese of the past 20 years who were content to work at low-paying, sometime dangerous jobs in unpleasant surroundings.
The burgeoning middle class wants to buy cars and homes and work in white-collar jobs, and it wants that lifestyle immediately. “The government runs scared of the expectations of these people. They are impatient people,” McGregor said.
China’s population is also aging. Today, there are three workers for every retired Chinese. By 2030, there will be one worker for every two pensioners, McGregor said.
Chinese leaders are responding to these changes by designating key economic sectors for growth. These are jobs calling for an educated, productive work force. Average salaries will be much higher than in the past, and the overall standard of living in the country will improve.
The new mantra is “indigenous innovation,” and the chosen sectors include clean energy and clean vehicles, biotechnology, medical equipment and devices, high-end software solutions, offshore oil drilling, urban transit and freight rail, Zarit said. The U.S. is a leader in freight rail technology, and China wants assistance in this area, he said.
China’s aging population is creating a need for goods and services for the elderly. Medical equipment and devices, pharmaceuticals and facilities to house and treat the elderly will be needed.
China’s emerging middle class is highly urbanized. Young couples are furnishing their apartments or homes, spending lavishly to do it, said Christopher Goode, managing director of White Dove (China) Products. The middle class also is dining out more and is eating more protein, which creates opportunities for U.S. agricultural products, Goode said.
The World Bank and others have urged China to move away from supporting the large, state-owned enterprises that have dominated production the past 20 years, but doing so will be difficult because the state-owned enterprises are affiliated closely with China’s Communist Party, said Clayton Dube, associate director of the USC-China Institute. The Communist Party is in charge in China and wants to stay in charge, he said.
Although China faces political and economic changes this year when Xi Jinping takes over as the country’s leader, the mood of the population is positive, Goode said. Most Chinese support the system because it has produced prosperity and economic growth, and for many young persons, that is all they have known. “Life is good,” he said, “and should continue to get better.”