Has China Lost Its Edge? Todd C. Lee Managing Director, Greater China Country Intelligence Global Insight
China s Export Powerhouse Guangdong Province Reported Large Scale Factory Shutdowns More than 1,000 factories in the shoemaking industry folded in 2007 (1/5 of provincial total) Mostly small and medium-sized firms (SMEs) Between 10 15% of Guangdong s shoemaking capacity Employed between 150,000 200,000 workers Shutdowns also reported apparel, textiles, plastics, and electronics By official reports, only 224 FIEs left Guangdong in 2007 Mostly SMEs in such labor intensive sectors as toys and apparel More then 90% are Hong Kong firms A survey by Federation of Hong Kong Industries showed 37% of the 80,000 HK firms in Guangdong plan to move at least part of their operations out of Guangdong Source: Global Insight China Regional Service Copyright 2008 Global Insight, Inc. 2
Competitiveness Challenges for China Cost Productivity Demographics Human capital Political and social stability Infrastructure/energy Intellectual property Financial system Environment Our Focus Copyright 2008 Global Insight, Inc. 3
Renminbi Appreciation Since Depegging in July 2005 (RMB appreciation against major currencies between Sep 2008 & June 2005, percent) Indian Rupee Russian Ruble Brazilian Real Indonesia Rupiah Thai Baht Taiwan Dollar Korean Won Yen Euro US$ -10-5 0 5 10 15 20 25 30 35 40 Source: Global Insight Country Intelligence Group Copyright 2008 Global Insight, Inc. 4
RMB Not Quite Back to the Level around China s WTO Entry 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 (Index, increase reflects appreciation, 1995=1) Asian Crisis China Enters WTO RMB depegged 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Effective Exchange Rate Real Effective Exchange Rate Source: Global Insight calculations Total goods trade with China s top 20 trading partners in 2005 (excluding Hong Kong) were used as weights; real exchange rates deflated by producer price indices. Copyright 2008 Global Insight, Inc. 5
China s Wage Rose Sharply Across All Industries Since Entering WTO 2002 Wage (US$/Hour) Total Manufacturing 0.60 2006 Wage (US$/Hour) 2002 06 % Change 1.02 69.7 Food Processing 0.43 0.72 68.9 Textiles 0.39 0.67 72.0 Apparel & Footwear 0.49 0.80 64.4 Chemicals 0.56 1.03 85.2 Ferrous Metals 0.81 1.51 86.5 Non-ferrous Metals 0.67 1.15 70.8 Transport Equipment 0.78 1.29 65.7 Electrical Machinery & Equipment 0.67 1.04 55.2 Electronics, Telecommunications, Computers 0.95 1.35 42.0 Source: National Bureau of Statistics, Banister (2006), Global Insight calculations Copyright 2008 Global Insight, Inc. 6
But China s Productivity Growth Has Outpaced Wage Growth 1,000 (1980 = 100) 800 600 400 200 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 Manufacturing Wage Rate (in US$) Manufacturing Value Added per Worker Source: China National Bureau of Statistics, Global Insight Copyright 2008 Global Insight, Inc. 7
Combination of Decent Productivity & Low Wage Makes China Competitive 100 (2002, U.S.=100) 80 60 40 20 0 Mexico Poland Czech Republic Hungary Turkey China India Unit Labor Cost Wage Per Worker Value Added Per Worker Source: van Ark, Banister, Guillemineau (2006) Copyright 2008 Global Insight, Inc. 8
Grouping of China s Regions Bohai South East North East Central South West North West Tibet Copyright 2008 Global Insight, Inc. 9
Labor Competitiveness Was Dominated by Coastal Regions More than 10 Years Ago (1995 data) Lowest Avg Labor Cost Region (national=100) Highest Avg Labor Prod. Region (national=100) Lowest Unit Labor Cost Region (national=100) Food Products Central (82) South West (178) South West (63) Textile & Clothing North East (61) South East (141) Bohai (91) Wood & Paper North East (65) South East (143) Bohai (84) Chemicals Central (76) South East (132) Bohai (82) Metal Products Central (87) South East (138) Bohai (80) Machinery N.E. & Central (79) South East (152) Bohai (88) Transport Equip. North West (78) South East (167) South East (79) Electronics North East (59) Bohai (153) Bohai (74) Total Manufacturing Central (80) South East (132) Bohai (85) Source: Chen, Wu, van Ark (2008) Copyright 2008 Global Insight, Inc. 10
Labor Competitiveness Still Dominated by the Coast, But Other Regions Are Gaining (2004 data) Lowest Avg Labor Cost Region (national=100) Highest Avg Labor Prod. Region (national=100) Lowest Unit Labor Cost Region (national=100) Food Products Bohai/Central (84) South East (164) South West (73) Textile & Clothing Central (71) South East (108) Bohai (82) Wood & Paper North East (75) Bohai (120) Central (76) Chemicals Central (76) South East (121) Bohai (93) Metal Products South West (90) North East (116) South East (96) Machinery Central (78) South East (113) Bohai (90) Transport Equip. North West (87) South East (135) South East (84) Electronics North West (79) Bohai (171) Bohai (76) Total Manufacturing Central (84) South West (110) South West (90) Source: Chen, Wu, van Ark (2008) Copyright 2008 Global Insight, Inc. 11
China s Output Composition Is Shifting Away from Light Industry 50 (Value added, percent of national total) 40 30 20 10 0 Mining Light Industry Heavy Industry High Tech Utilities Other Source: China National Bureau of Statistics 2001 2006 Copyright 2008 Global Insight, Inc. 12
One-Child Policy Hurts China s Future Demographics (Age 15 64 population, percent of total population) 75 Peaks at 2012 70 65 60 55 50 1980 1990 2000 2010 2020 2030 Source: United Nations, Global Insight Copyright 2008 Global Insight, Inc. 13
China s Education Enrollment Is Fast Improving (Education gross enrollment rates, percent) 120 109 Secondary Education 120 Tertiary Education 100 93 100 80 70 80 69 60 40 20 0 52 35 38 40 N/A 60 40 20 0 21 11 48 12 6 3 16 Brazil* Russia India China Brazil Russia India China 1985 2003 * Brazil s 2003 secondary net enrollment rate = 75 1985 2003 Source: Carnoy (2006) Copyright 2008 Global Insight, Inc. 14
China s Labor Force Is Expected to Become Increasingly Well-Educated 500 (Million laborers) 400 300 2025 College = 152.2 mil. Grad Sch. = 11.1 mil. 200 100 0 2007 College = 51.9 mil. 1980 Grad Sch. = 1.7 mil. College = 3.9 mil. Grad Sch. = 0.048 mil. 1980 1990 2000 2010 2020 Source: Holz (2005) Primary Middle School College and Grad School Copyright 2008 Global Insight, Inc. 15
Taking Stock of China s Competitiveness STRENGTHS Fast productivity growth Large domestic market Agglomeration economies Improving human capital Political stability Low security risk WEAKNESSES Fast rising wage in light industries State controlled energy sector Inefficient financial intermediation Environmental degradation Insufficient intellectual property protection Corruption Copyright 2008 Global Insight, Inc. 16
Download a copy of this presentation at www.globalinsight.com/events/ppchicago2008 Thank You Todd C. Lee Managing Director, Greater China Country Intelligence todd.lee@globalinsight.com