China’s move upmarket is essential

In an article entitled “The most significant gap in the domestic cycle: why are Japanese wages four times higher than those in China? “the research bureau Tigger Trend asks about the twists and turns of 2019-2020 that lead to a domestic cycle strategy (see here). After studying the reasons for the wage differential between China and the two countries, Korea and Japan, it shows that the lack of middle/upper-end industries in China is a handicap and a factor that pushes towards the middle income trap (the inability to create a real majority middle class). For him, this trap is the objective of the decoupling that the American adversary wants to initiate. The author raises the problems of demographic aging, the need to move up the ladder, and hopes that lifting a hundred million people out of poverty will bring significant benefits. Below is a translation/summary of the main passages of the article.

“The United States is trying to decouple from China to lock it into the middle income trap. Few have noted this. The country is trying to build a system with a domestic cycle, but will it work?

Medium and high-end industry, the comparison with Japan and Korea

Advantage Japan/Korea
Why is it that when we travel to Japan and Korea, we often see a waiter in an ordinary restaurant earning a salary of 10,000 to 15,000 yuan. Why can such a low-skilled position be paid three or four times more than in China?
Japan and South Korea have a higher proportion of high-end industries. With a population of more than 100 million, the former has 52 Fortune 500 companies such as Toyota, Softbank, Mitsui, Fujitsu, and Toshiba. With a population of approximately 50 million, South Korea has 16 Fortune 500 companies, including Samsung Electronics, Samsung Life, Samsung Bussan, SK, LG, Hyundai, and Kia. With a population of 1.4 billion, China has only 129 companies in this ranking, 2.5 times more than Japan, which has a population 14 times smaller. The two neighbors, proportionally, have much more middle and high-end industries. The overall productivity of production is also higher and can create more wealth per capita. Employees who work in high-tech sectors are better paid. The low-end jobs that serve these people also benefit, since they are three to four times better paid than in China. Therefore, a country’s people’s ability to earn high incomes depends on the region’s strength in scientific and technological innovation and the level of the industry.

Made in china and Japan Korea

Vital transformation

If China is slow to transform and modernize successfully, our wages will inevitably be lower than those in other countries. China’s per capita income is only one-quarter that of Japan and about one-third that of South Korea. By 2019, China’s GDP per capita will exceed $10,000, $2,375 below the high-income country threshold. In the 70 years since World War II, only 12 countries have not fallen into the “middle-income trap. (The author talks about a country’s inability to create a real majority middle class.) Most of the economies of more than 100 million people – Brazil, Mexico, the Philippines – could not avoid this trap.  
The targeted decoupling highlights the low human cost competition from low-income countries and the intense competition for innovation from high-income countries, which increases the risk factor of a slowdown in Chinese economic growth.

U.S. Actions

In the last two years, the United States has blacklisted 300 Chinese entities and personalities. These include industry giants such as Huawei, ZTE, China Aerospace Science and Technology Group, China Electronics Technology Group, Qihoo 360, Shang Tang, Kuangxi, and Etu, as well as research universities including Beihang, Harbin Institute of Technology. These institutions are all at the forefront of technological innovation and the application of incubation technologies. The restrictions imposed prohibit exports to the United States. This is the equivalent of a technological blockade.

Objective: cut off access

The U.S. is trying to cut off China’s access to advanced technologies and critical components. Decoupling China and the U.S. will invariably slow China’s industrial modernization. This will make it more difficult for us to compete with high-income countries on innovation.

Production is moving out of China, consequences

Simultaneously, rising land and labor costs have led to the relocation of some low-end manufacturing operations in China to regions such as Southeast Asia and Africa. This will harm labor income growth in low-end industries. To remain competitive, companies are trying to reduce wages.
Under this double pressure, China could be held back, low-end industries cannot raise incomes, and high-end industries cannot enter the global high-end. The whole society’s wage level will remain at the same level as before or will increase slowly. This is a point we must be vigilant about and not take lightly.
Whether China can overcome the middle-income trap is not determined by the rich, but by the poor.

Agriculture: vital point 命门

Many may not realize that one of China’s lifebloods is, in fact, agriculture. The productivity of agriculture naturally lags behind the industrial sector. Indeed, harvesting is not only a collection of human labor and ingenuity but also a variable factor – climate – that man cannot eliminate. The growth cycle of agriculture is fixed and almost immutable. In the tropics, rice can be grown for three seasons, and in temperate regions for two, and there will not be five to ten seasons due to the use of machinery and improved fertilizer technology. The manufacturing industry is different. The industrial system is a relatively closed system that eliminates interference from nature as much as possible. In the 1840s, a woman could sew only one shirt a day; after the sewing machine’s invention, she could sew 11. In 1914, at the outbreak of World War I, it took Ford 14 hours to assemble a Model T. Ten years later, one was produced every 10 seconds. Improvements in industrial technology and the optimization of the production process occur every minute of every day. Sometimes it’s fast, sometimes it’s slow, but it will undoubtedly continue and never stop. Thus, these two industries’ characteristics combined lead to one result: the farming population is struggling to get rich, and the industrial capacity is easily overloaded. This is a problem that every country in the world has faced.
And compared to the United States, China’s agricultural population faces a much more difficult challenge to get rich. It is much harder to promote large-scale mechanized agriculture because there are many people, and the land is not abundant. Agricultural productivity naturally lags behind the industry. Many rural areas have not benefited from the dividends of China’s rising industrialization and urbanization, which has led to poverty.

Decrease in poverty

At the end of 2012, China still had 98.99 million people and 832 poor counties. This population of nearly 100 million lives under too complex environmental, historical, and social conditions, such as sterile water in the loess plateaus and physical disabilities. Still, China set the burden in 2015 to fight poverty, completely eradicate poverty by the end of 2020, and lead 1.4 billion people to a well-off society. Why does it? In addition to the political and historical mission, there is also the economic role that cannot be ignored.

Disappearance of the demographic advantage

We must be aware that China’s demographic advantage is disappearing. In 2011, China’s working-age population (15-59 years old) peaked at 940.72 million, dropping to 911.25 million by the end of 2019. This “evaporation” of 29.47 million people is equivalent to the loss of an Australia. In 2000, China had 130 million people aged 60 and over, or 10.3% of the total population, and by the end of 2019, it had 254 million, or 18.1% of the total population. That’s almost double in two decades. The decline in the labor force, together with the increase in the number of older adults, will lead to a reduction in the level of social consumption and a slowdown or even contraction in the growth of domestic demand. The data also show that in 1990, China had 316.59 million children aged 0-14 years old, who accounted for 27.7 percent of the total population, compared with 16.9 percent in 2018, with 235.23 million. In 1998, there were 139.53 million students in primary education and 63.01 million in junior secondary education. In 2018, they increased to 103.39 million and 46.52 million, respectively. Consumption for infants and children in China is declining today, as is the consumption for education.

100 million people

The war against poverty previously waged aims to give these 100 million people a higher level of consumption. We must never underestimate the power of these 100 million people. Their incomes will not be very high when they come out of poverty. They may not be able to afford to buy cars, computers. However, they will be able to afford items from 500 to 1,000 yuan; it’s a start. The 100 million people who will have become affluent will have the opportunity to invest in their children’s education and cultivate a large reserve army of relatively good quality labour. This will help China continue to promote advanced technologies on the ground and increase social productivity. This will provide China with a more substantial basis for competing with high-income countries in technological innovation. The number of poor people in the country’s rural areas increased from 98.99 million in 2012 to 5.51 million in 2019, with the poverty rate falling from 10.2% to 0.6%.  
The effects of integrating nearly 100 million people will be slowly felt in the future. It will gradually increase the level of domestic demand throughout society thanks to the chain reaction’s transferability, making the current Chinese economy better able to build a domestic macrocycle. To me, the domestic cycle has a significant meaning, which is to give China’s independent innovation a testing ground.

All our innovative products may be unstable and expensive at the beginning. Still, it is nothing if the domestic market is ready and able to consume, companies can continue to improve and eventually catch up with the international level. In this way, China will be able to accelerate industrial transformation and upgrading, raise the average wage level of society, and not fall into the middle-income trap. The market is vast, with a population of 1.4 billion people, including 400 million middle-income earners. The country has now entered a phase of development, from $10,000 to $30,000 in income, with significant economic vitality potential. »

China is doing a lot to move up the range and get out of the lower end of the Made in China range. Investments in digital technology are one example. Will the measures taken by the Trump administration, the recent direction of globalization, and China’s structural problems overshadow the country’s dynamism? When we take a cold look, detached from all the ideologies, passions, and interests of many observers, we can see that this is the most challenging period in the last four decades and that the obligatory optimism must be tempered by more realistic considerations that are partly evoked in this analysis.

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