The last few years have seen the departure of some international groups, even Chinese, to lower cost countries such as India or Vietnam, see the articles on the subject here, India and Vietnam. It is interesting to see the point of view of a Chinese economist on the subject. Wang Hanfeng, 王汉锋, gave an interview to the China Securities Journal and details the four strengths of China. China has a global industrial value that accounts for 30% of the world’s worth; it continues to grow and move up the value chain.
1. The size of the Chinese market
The first strong point is the size of its market. The demand for a large market is the cornerstone of the development of all industries. It stimulates investment in production capacity, industrial bases, and raw materials. Domestic consumption growth gives enterprises a lot of room for manoeuvre and will undoubtedly enable China to become the world’s largest market.
2. A production chain
Most of the production lines are complete. The supply of raw materials makes it possible to do practically everything in China. For example, for cars with new energies, the availability of raw materials and engines makes it possible to meet the final production demands.
They are highly developed with two super networks. A. The rail network enables logistics to be optimized. China has 35,000 km of high-speed lines, 70% of the world network. Other next lines will be opened soon. B. Telecommunications are highly developed, 5G was launched last November. In 2020, 180 billion yuan will be invested to build 600,000 5G stations. They help companies to reduce their costs and have better returns.
4. Increasingly qualified personnel
Admittedly, the aging of the population and rising labour costs in labor-intensive sectors weaken the “personal” advantage. But the “reserves” of talent and commitment to research have shifted from “population dividends” to “engineering dividends.” This year, 8.34 million students will graduate (bachelor’s level), and 640,000 researchers will leave academic institutions. In 2018, there will be 1.52 million engineers or 1105 engineers per million inhabitants. This gain in qualifications will enable the country to move up the ladder and improve its research and creativity.
Reasons for the departure of companies from China
At present, withdrawals from China correspond mainly to three types: A-situations. The cost of labor and the environment are leading to departures, particularly in the textile and furniture manufacturing sectors, which are labor-intensive. These departures were bound to happen sooner or later. B. Local competition has intensified and reduced the market shares of international groups, particularly in household appliances, smartphones, construction machinery and even in the services sector C. For uncertain factors (the economist probably points to political reasons and the Sino-American trade war), companies are leaving the country, this is not dominant.
The first two situations are related to the rise of “inferior products” in Chinese production; there is no reason to worry. The American Chamber of Commerce in China had distributed a questionnaire to 372 member companies. It appeared that 17% were thinking of withdrawing their production lines from China, compared to 23% in 2017 and 19% in 2018, with a downward trend. 59% of departures benefit emerging Asian countries. China is still the most important market.
At the end of 2018, 590,000 foreign companies were investing in China. They accounted for 25% of industrial profits, 20% of tax revenues, and 40% of international trade, 5% of jobs in cities and 4% of real estate investments. The trend has been declining since 2013 with the change in the structure of Chinese production and the growth of Chinese companies.
Three important points for the future
In the long term, from an economic point of view, if progress continues in opening up to the world, the effects of reform on the internal market, the renovation of industries, there is no point in worrying too much about unrest abroad. Investment should focus on three points: 1. the internal market. 2. The increase in consumption and the improvement of production capacity. 3. Import substitution. The changes in the international context will push China to take into account new developments in the international market.
Source : 王汉锋：中国仍是跨国企业最重要市场
15 June 2020