Paper Edition | Page: 7
For the past three decades, China has been best known as the “World Factory” for its low labor cost and manufacturing capabilities.
The “Made in China” label can be seen across different products, in particular those in the traditional consumer space, such as toys, clothing and footwear.
This has been a major driving force of economic growth in China. As of the end of 2011, according to the Chinese National Bureau of Statistics (NBS), the manufacturing sector contributed over 32 percent to China’s GDP. China also accounted for the largest share of global trade, at 10.6 percent, compared to the US’ 8.2 percent, according to the World Bank.
Underpinning the low-cost comparative advantage of manufacturing enterprises were the abundant low-cost labor that migrated from rural areas; and the specialized industrial clusters that gradually took shape in the coastal regions.
However, after 30 years of fast growth, the “Made in China” model is becoming unsustainable. With rising labor cost and increasingly unstable labor supply, low-end manufacturing enterprises in China began to relocate to low-income countries such as Indonesia, Vietnam and Cambodia in the last few years. International brands such as Nike, Coach and Muji have all announced plans to scale back the manufacturing base or share of orders processed in China.
The urban minimum wage in China has gone up for three years in a row since 2010 and in the first half of 2012, 16 provinces raised the minimum wage further by an average of 19.7 percent.
According to NBS, in the first half of 2012, Chinese urban residents’ real per capita disposable income grew by 9.7 percent, while rural residents’ real per capita cash income grew by 12.4 percent, both outpacing the real GDP growth of 7.8 percent during the same period.
With the income growth comes the concept of “Made for China”. Chinese households are spending more not only on better food, brand name clothing, luxury automobiles and other high-end consumer goods, but also on services such as telecommunication, travel and tourism, entertainment, education, healthcare and insurance.
The need for upgrading goods consumption and expanding service consumption means there will be great room for development and investment opportunities for sectors such as agricultural products, safe food and beverage, mid- and high-end consumables, healthcare, financial services, tourism and cultural recreation. Household registration reform and improved urbanization quality will also support the development of the real estate industry in a longer run.
Chinese consumers have already emerged as major customers of luxury companies. Company data shows that sales revenue of nine international luxury brands in the Greater China region on average accounts for 20 percent of their global sales. Looking forward, as the household disposable income continues to grow, this share is likely to increase in the future.
In the agricultural space, the Chinese are eating less grain but more meat as their income grows. Livestock consumes much more grain than humans — for example, it takes 13 kilograms of grain to produce one kilogram of beef.
As people eat more meat, the indirect consumption of agricultural goods also increases. There is also a demand for “quality” food and beverage. Prices of the three leading liquors in China (Maotai, Wuliangye and Luzhou Laojiao) have more than doubled since the beginning of the 21st century.
Service consumption so far remains a small part of the overall consumption in China, representing merely 20 percent of total goods consumption, compared to more than two thirds in the US For example, there are abundant opportunities in the insurance sector due to the lack of a national social welfare system, an aging population and fast growth of family wealth.
With total premium ranked sixth worldwide, China is now the world’s fastest growing insurance market. Medical service expenditure is another area set for significant growth due to an aging population and higher living standards.
In the US, after reaching China’s current per capita income level in 1974, its household expenditure on medical services kept expanding for more than two decades until hitting 16.1 percent of its total expenditure in 2011.
The emergence of the “Made for China” theme does not mean that consumer goods will no longer be “Made in China”. China’s manufacturing industry still maintains some competitive advantages over other lower-income countries, including better infrastructure, a more complete manufacturing chain and larger domestic market.
Many former export-oriented enterprises are now increasingly focused on domestic consumption and virtually all services are domestically provided.
It is important to recognize that economic transformation in China is extremely important after two decades of rapid growth driven by exports and investment, which has led to the current imbalanced and unsustainable growth model.
Although demographic factors could influence the shift in the growth model, proactive policy initiatives should be adopted with the intention to accelerate economic transformation. Policies need to be implemented to reduce the still widening income gap, develop consumer credit, rationalize public expenditure and tax policies, and require state-owned enterprises to increase dividend payout.
The household registration (hu kou) reform will be strategically important to the long-term economic development of China. In China, urbanization quality and consumption growth have been undermined by the household registration system.
NBS data shows that over half of total population is living in urban areas at present, but as Vice Premier Li Keqiang recently said, the number of people holding urban household registration (eligible for urban social welfare) amounts to only 35 percent of total population. If the household registration system is abolished, enormous suppressed consumption demand will be released and the growth of service industry will also be accelerated.
The Chinese government is already implementing a slew of measures to promote consumption. Under the low-income housing program, 35 million apartment units are planned to be constructed by 2015 for those eligible — tremendous consumption demand would be unleashed if those who are currently living in a dorm move to their own apartment.
The Chinese Securities Regulatory Commission has also required listed companies to pay more dividends to shareholders. An underdeveloped consumer credit system has hindered consumption — most of consumption is paid in cash, suggesting that better developed consumer credit could potentially provide a great stimulus to consumption.
The writer is vice chairman and chief investment strategist of Goldman Sachs’ investment management division, China
No comments:
Post a Comment