Archive for Exports

China needs home-grown entrepreneurs.

Posted in Business Culture in China, Macroeconomics with tags , , , , on February 10, 2015 by Ben Brown
Chongqing at night

Chongqing at night

The changing economy of the People’s Republic fascinates me.

I remember about five years ago I told a friend of mine I that China’s government would soon be forced to create policy enforcing IP laws and creating an environment more conducive to small businesses, entrepreneurial endeavors, creativity and innovation. I told him my suspicion was that we could look to Chinese banking systems to see when these types of changes were most likely to take effect. I said that in a few years China’s export manufacturing industry would mature. Its growth rate would slow. The booming real estate industry would also outpace the rate of qualified buyers entering the city. Furthermore, a lot of China’s real estate boom has been helped by subsidies in the form of instant property value: unlike the rest of the world, many Chinese in their 50s and above were given houses by the government. When the developer comes to negotiate with the homeowner they offer either cash or a new home. A successful family that had already turned their old communist-era apartment into a rental property and bought their own place could take the cash and buy a car, invest in stocks, buy a home for their children, etc. Nobody had to pay back home loans.

Just by looking around Chongqing, I would guess that the majority of those old apartment blocks have now been torn down. There are still people who own loan-free property but the apartments are fairly new and offers to buy a whole complex by a prospective developer are becoming increasingly sparse. Unsurprisingly, the lack of loan-free equity lying around that supplemented the construction boom has successfully slowed prices even in a city like Chongqing, whose GDP grew at 13% in 2013, making it the fastest-growing city in China.

Export manufacturing has also slowed. This was to be expected. As costs along the accessible coast have risen, low-cost manufacturing jobs have either moved inland or to other neighboring countries like Vietnam.

China still needs growth. The leadership generally looks at GDP, which is not always the best indicator of a stable economy. However, I still think it’s reasonable to argue that in order to have an economy large enough to support a population 5 times the size of the US, China needs a national GDP equal to at least 3 times the size of ours.

In order to grow that large with export manufacturing and real estate both slowing down, China will need to support a more entrepreneurial domestic economy. I currently teach English to the children of China’s wealthy. I regularly ask them to pretend they are a member of the standing committee and tell me what changes to policy they would enact in order to create a more innovative and creative economy that eventually will be able to compete on an even playing field with the west. It takes them awhile, but generally they come down to entrepreneurialism without too much prodding or hinting.

Five years ago I said we’d see Chinese banks start offering more small business loans to Chinese general population as a start of the development of a more open, even playing field that would then lead to IP law enforcement. Instead we’re seeing policy changes opening up certain areas (Shanghai has a district like this) to low or tax-free zones for more and more businesses. The higher-ups are lowering regulations. But without access to funds, a private credit rating system, and assurances that Mr. Wang’s new invention won’t be stolen by the more connected Mr. Chen, we will not see the type of growth this country needs to beef up its domestic economy. Without that strengthening, I worry about how this country will continue to grow to a size and scope capable of supporting a solid middle class. But I remain hopeful I’ll see these things soon.

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China’s Exports: A Brief Overview.

Posted in Business Culture in China, Macroeconomics with tags , , , , on April 4, 2010 by Ben Brown

Dani Rodrik, a famous Harvard international economics professor, wrote an article titled “What’s So Special About China’s Exports” in the China and World Economy Journal.

Rodrik posits that taking a country’s per-capita GDP level and comparing it to the quality of its products exported (using internationally accepted 6-digit commodity indicators), then comparing the results to the per-capita GDP of like-quality exporting nations, one can assess whether or not a country is performing above or below expected technological levels. He refers to the product quality / PPP ratio as the EXPY ratio.

In other words, is China exporting more advanced levels of product than its per-capita GDP indicates is reasonable? His research, which is well explained and appears very accurate on its face, indicates that China has not only advanced at a high rate since opening its doors in the late 70s, but has actually risen to a level of productive know-how that far surpasses where it should be in relation to its per-capita GDP. China’s protection of its domestic market, attractive labor costs, low fixed capital costs, policies requiring joint venture agreements from sources of FDI and the tax breaks afforded to foreign investors all led to the development of productive capabilities that far overshot expectations given its income levels.

Fundamentally, a country that exports products at increasingly higher technologically-advanced levels will experience higher per-capita GDP and a more stabilized market. But he argues at the end of the article that China will soon reach a glass ceiling of sorts as its ability to continue producing more advanced-quality products will require higher levels of entrepreneurial R&D and better IPR protections than the country currently offers. Government policies will need to change in order for China’s growth to avoid stagnating.

I firmly agree with Rodrik’s arguments regarding China’s development. I believe that understanding the history of China’s economic policy makes determining challenges to its continued development and the steps it must necessarily take to remain competitive an easier task. Looking at Rodrik’s assessment of China’s current quality-level of productivity in relation to its per-capita income points to a need for economic policies more aligned with a fully-developed country than one still maturing. This indicates that over the next decade, should China want to maintain a minimum growth rate of 6.5% (stated as necessary by government officials to continue providing new jobs for its migrating work force) it must focus on introducing policies more protective of IPR issues and supportive of R&D initiatives.

Cited Works:
“What’s So Special About China’s Exports?” China & World Economy, vol. 14. no. 5, September-October, 2006, 1-19.

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