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FEATURE STORY: Sustainability of China's Trade-led Growth
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Sustainability of China's Trade-led Growth

By Mike Ross

BT 201501 40 Feature story The speed of China's rise to trading superpower status has been nothing short of phenomenal. Foreign trade has become China's main engine of economic growth, contributing to over 50 percent of China's GDP since 2002. In spite of these remarkable achievements, there remain a number of important social and economic challenges, including various economic imbalances that stem from the rapid trade-led growth, which could jeopardise the stability of the economy.

In 2013, according to the World Trade Organization China's merchandise trade volume exceeded 4 trillion USD for the first time and replaced the US as the biggest country of merchandise trade. Since then it has been on a modest growth trend, and the country's exports and imports are voluminous partly because its economy is huge. Relative to the size of its GDP, China's trade is below the world average. Exports and imports were equivalent to almost 52 percent of GDP in 2013, whereas the ratio of global trade to world GDP was over 63 percent. But goods are not the only commodities that countries trade. If trade in services is added to trade in physical (merchandise) goods, China remains number two. However, compared with the country's huge surplus in merchandise trade, China's trade in services presents a continuing and huge deficit in comparison. This is an area that Chinese officials seek to develop vigorously in the coming years, and in order to remain a trading super power, rigorous restructuring of the economy is required based on innovation led by research and development.

As China nears the end of its catch-up phase of growth and if China's economy was a product, it seems that this product would most likely be in its early maturity stage in the product life cycle. The phenomenal growth had made it seem as if it is still in the growth phase but since the recent halt and slump in the economy, it has progressed to the maturity stage. As any product, with time it will reach the decline stage. In the field of strategic management, according to the "Ansoff matrix", strategic direction in the means of product development, market development or diversification could be used to extend the time gap or extend production. This requires fundamental rethinking and radical redesign which is called BPR (Business Process Re-engineering) in operations management. Therefore it is evident that the Chinese government is executing its future economic policy with research and innovation at its forefront.

BT 201501 41 Feature story Bahrain JObsWhile developed economies saturated, leading to an economic meltdown during the last decade, the Chinese economy took advantage of this window of opportunity and boosted its production and involvement in global trade. Between 2001 and 2008 China's trade grew exponentially with imports and exports both crossing the 1 trillion USD mark and it quadrupled within less than half a decade in 2013. According to latest statistics by the government, in the first three quarters of 2014 China's GDP growth rate reached 7.4 percent but is predicted to be around 7 percent in 2015. As the west gains momentum in rejuvenating their economies, the economic environment is far more different from when China witnessed its fast growth during the period from 2002-2008. The spotlight is now on the Middle Kingdom and it is under the microscope. So it is clear that strategists are aiming to redefine their 'Blueprint less' economy through an array of concepts and policies while at the same time being pragmatic and experimental. The recently concluded "Annual Central Economic Work Conference" focused its agenda on GDP growth, monetary policy, banking reform, and reform of SOE's whilst the state council announced a plan to set up three new pilot free-trade zones in the country. These measures are very much essential for the growth of the micro economy and its connection to the world, and it is also important to create a sound environment to facilitate mass production domestically.

The country's keenness to agree upon Free Trade Agreements (the highest number of substantial FTA's agreed upon by one country in the recent past), seeking to expand cooperation with the Central and Eastern European (CEE) countries, promoting trade ties with countries along the Silk Road amongst many others are a means of expanding the market for Chinese exports. But as mentioned earlier, the economic environment has transformed rapidly and it is no longer a pre-millennia scenario for the country. Although having substantial inbound FDI, more Chinese companies are expanding abroad. China's outbound direct investment by non-financial firms jumped 16.8 percent to 90.2 billion USD in the year 2013 from 2012. 90 percent of the total outbound investment went into six industries: commercial services, mining, wholesale and retail, manufacturing, construction and transportation. While heavy dependence on manufactured exports has left China vulnerable to import restrictive measures from its trading partners, this latest trend of outbound investment which would surpass inbound investment into China in 2015 will pose a threat to domestic production which has had an export-led growth for almost twenty-five years.

BT 201501 41 Feature story China EU tradeChina faces double-digit wage increases and rising costs across the board that are making the country less and less attractive as the world's workshop. China's trade has long been structurally imbalanced, with overreliance on exports from traditionally low skilled, low technology, and resource and labour-intensive industries. These industries are beginning to lose their external competitiveness as labour costs rise and labour force growth slows, and because of bottlenecks in land, water, and energy resources exacerbated by over-extraction and duplicate investments. In addition, until 2008 the majority of China's exports were from trade processing industries with low value added. For instance, China earns only two percent of the total value for each iPad it assembles and exports to the rest of the world. Such structural imbalances cast doubt on the long-term sustainability of growth in trade and the economy.

Diversification of the economy for China is possible in two ways: to reinvent the trade in services to boost the sector and encourage industrial innovation. Services trade is an important part of foreign trade by and large. Structurally China's exports of services still mainly focus on travel (tourism), transportation and other traditional services, and the emerging services industries, such as communication services, insurance services, financial services, royalties & license fees, film & audio-visual, have a smaller proportion in China's exports of services. The competitive advantage of the country's services trade is lacking and competitiveness is lower than the global average. Improvements in the education sector with vocational, professional and hands-on training and raising quality standards criteria to match par with global levels will bring in confidence to trade in services. The recently held "Summer Davos" in Tianjin carried the theme "Creating Value through Innovation", and Prime minister Li Keqiang's state visits to many countries included innovation at the forefront of his agenda and suddenly China seems to have woken up to innovate. But it is understood that in order to maintain (remain in the maturity stage) or even improve (extend and expand) the economic status they have achieved, innovation is vital to differentiate their production portfolio since the global economic ground is pretty much levelling and the country's comparative advantage based on labour seems not to support its production based export-led growth. China's processing and assembling trade brings a trade surplus for China, but the value-added brought by its processing and assembling trade is minimal in the whole value of goods, and this demonstrates that in the vertical division of labour of intra-product specialization China's advantage is still in labour, although China's exports are high-tech products. Hence It is necessary for China to continue to increase its technology and industry advantages. Product, process and organisational innovation should be driven to harness competitive advantage stimulated through economies of scale and revitalizing technology and industry in China.


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