China will continue to expand its economy, but its growth will be based upon technology and innovation rather than low-cost labor, according to a consultant who has lived there for the past 20 years.
For U.S. companies seeking to invest in or sell their products to China, some of the best opportunities will therefore be found in areas such as clean-energy technology, information technology, biotechnology and high-end manufacturing, said James McGregor, senior counselor in Beijing to APCO Worldwide.
China over the past 30 years has experienced unprecedented growth as the so-called factory for the world. That economic model, which began under Communist Party leader Deng Xiaoping, is running out of steam, McGregor said.
“The Deng Xiaoping era is over,” McGregor told the annual Asia/Pacific Business Outlook conference Tuesday at the University of Southern California.
China will not forgo low-cost manufacturing altogether. Some of the manufacturing will shift inland. Many plants will remain in the coastal regions but will achieve significant productivity improvements through implementation of technology. Other plants will move to Southeast Asia in search of low-cost labor. “It will balance out,” he said.
The focus of government initiatives today, however, derives from the “indigenous innovation” movement that the government announced in 2006. China is encouraging scientific research and its application to industries that will employ the millions of college graduates that are pouring into the work force today.
The number of college graduates each year has tripled to 6 million. These young graduates have known only prosperity and exponential economic growth in their lives. They want white collar jobs that will give them instant middle class status. “The government runs scared of the expectations of these people. They are impatient people,” McGregor said.
Although China has been the subject of much criticism from international institutions such as the World Bank for the massive number of state-owned enterprises that dominate its economy, U.S. companies that want to do business in China should not expect these enterprises to lose their influence anytime soon.
In many key sectors of the economy, state-owned-enterprises control 75 to 90 percent of the assets. “This will be hard to break because they are integrated with the Communist Party,” McGregor said.
It is difficult to predict what type of reform, if any, will occur later this year when Vice President Xi Jinping replaces Hu Jintao as head of the Communist Party, but the country’s new leader will have to deal with the “princelings,” or descendants of prominent and influential senior Communists, that have gained influence in China, McGregor said.