Will The China Model Sustain Itself In The Long Term?

Will The China Model Sustain Itself In The Long Term?

As any economist will tell you, as the demand for any product or service increases beyond the level at which it can be supplied, the price for it increases. Look at the state of the Indian BPO industry for example. Salary and compensation levels rose rapidly when a number of multinationals were setting up shop in India and there was a huge demand for trained manpower. Today, those same jobs are moving to cheaper and ever more low cost markets like Vietnam. Is this trend likely to continue to the point where China loses its edge completely?
Experts say this is not likely to happen in the short to medium term. China’s population and manufacturing capacity is the prime reason. The world’s most populous country, there is no other country that can raise a workforce the size of China’s, especially not countries like Vietnam. However, the South-east Asian region as a whole could possibly create a significant impact. The other possibility is Africa. This underdeveloped continent has the potential to be the world’s labor pool, if the various sub-groups and regional tribes can get over their internal differences.
Coming back to the point of China’s sustainability, the labor pool and government incentives have been the primary reason that by 2000, the country was a compelling destination for most multinationals. Companies either set up their own operations or used the country’s contract manufacturers. Those that didn’t faced a highly competitive market where the “China Price” held sway over the market, and ranged around one-third to one-half of what it cost manufacturers in the West.
To sustain the 8 to 11 % annual growth, the Chinese government introduced subsidies in fuel and energy generation. With the cap on energy prices, the gap in production costs between China and the rest of the world increased over the last five years. However, the sustainability of this move is now under pressure. In order to maintain the growth rate, apart from subsidies, the government has also artificially maintained the exchange rate of the renminbi. The key issue for Chinese policymakers is to sustain the growth in order to keep the population satisfied. And social unrest is what the government fears most.
However, the government’s gamble has paid off these last two years. However, the subsidies on energy expenses will have a long-term damaging effect. Subsidies have a tendency to encourage inefficiency, and in the long run, this will affect the competitiveness of the Chinese manufacturing industry. Higher cost on the other hand has a short term damaging effect, but makes industries more efficient in the long term.
The strategy for companies already in China revolves around two options. They can either choose to pay the higher wages now being charged or choose to set up new plants in the interior, where the costs in terms of labor are lower and the logistics provide easier access to coal and other raw material sources. And the long term focus will have to shift to efficiency building, something that has been ignored due to the low wage advantage. And the resulting job losses from increased efficiency? These will help the creation of more factories, as well as help the evolution of jobs from low-end manufacturing to more value-added services, as is happening in other places like India.