Is The Rise of Asia a Threat to China’s Economy?

Overview

Over the last decade, China has taken the world by storm due to their surging economy. Now many of the policies that were so successful in China are being emulated by many other countries.

 

Article Highlights

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Questions have risen from many economists about the sustainability of such long term growth. Many point to the difficulty the nation would have in transitioning from an unsustainable manufacturing based economy to a services and consumption based one (as is seen in more developed countries like the USA). This manufacturing based economy is, in all likelihood, what you are most aware of in relation to China. Many countries have been flooded by cheap Chinese exports, fueled by the rise of the internet, access to the lowest priced goods from all over the world has resulted in consumers paying the lowest possible price.

However, this article will not be looking into what made China such an economic behemoth. This has already been well documented over the years, and relevant articles can be found within our trade wiki if you would like to read up on this topic. Instead, we are going to look farther away, to the whole of Asia and see what developments are emerging, and if they pose a risk to China itself.

Growth in Asia
Developing Asia's growth rates are still lower than those of China alone

China’s Competition

The driving force that attracted companies to invest into the manufacturing sector of China was purely price. While this may be quite the generalisation, the fact that China could offer such low prices due to their tiny labour wages did make the country an attractive manufacturing hub.

This low cost manufacturing model is what helped fuel the country’s economy, but this set up is not one that is unique to China. Many other Asian countries are able to compete in terms of prices. India and the Philippines are suitable examples, both are countries who can offer lower wages and worker turnover.

Despite this, there are other costs to consider. The price of a product is not only determined by how much it costs to make in a factory. Taxes, logistical aspects, and efficiency are all areas that can influence price, and this is where China really excels in when compared with competitors. Certain cities within the country provide favourable tax breaks to help boost their own local economy, and the government has invested heavily into infrastructure. Furthermore, productivity is constantly increasing, at a rate faster than other Asian competitors such as Indonesia and Taiwan. When accounting for the overall cost of the goods, China often comes out the winner.

While for now, other Asian countries do still have some catching up to do, before they can compete effectively with China, they are other factors which are making the future look bright. Previously mentioned, wages are one factor, which countries like Vietnam and Indonesia paying $6.70 and $8.60 a day to factory workers, compared to China’s $27.50, prices aren’t the only thing of importance. With China, the country is seeing social change. As a result of their recently overturned one child policy the population is ageing, with the working age population reaching its peak in 2012.

Other social factors also include the increasingly common level of strikers being seen. Chinese workers are becoming increasingly supportive of their own rights, resulting in factoring producing goods for global brands such as Nike and Nokia being disrupted. With the rising income levels seen across the country, the young Chinese population are less willing to put up with the same levels of working conditions as their parents. There is an attitude shift being seen throughout the country, one that is not uncommon for countries with developing economies.

As mentioned earlier, China has started to shift towards a consumption based economy, meaning they are starting to import more from other countries. This effect is seen because citizens now have higher salaries and in turn disposable incomes, allowing them to purchase more luxury goods, many of which come from abroad. This change itself may be damaging to China’s low cost manufacturing industry, because higher imports would most likely come from other Asian countries due to their convenient locations. This would help fuel grow in potential competitors.

How Concerned Should China Be?

At least in the short term, I do not believe the country should be too concerned. All the threats posing China are legitimate, but the biggest threats are against the low cost manufacturing sector, one that China are prepared to lose themselves. Manufacturing will continue to play an integral part into the country’s economy, but the nation is looking to become a specialised manufacturing hub. This commitment has been seen in increased levels of research and development, hoping to achieve new levels of innovation. This change should protect their manufacturing industry from the increases in low cost manufacturing currently being seen in many Asian countries.

Other relief would also be found in the sheer advancement of the supply chain within the country. Particularly the infrastructure throughout the country is extremely advanced, especially when compared with other Asian countries. China is continuing to invest in infrastructure, recently announcing 66 new airports to be built over the next 5 years. Furthermore, expansions to existing airports are taking place, including a new runway to Beijing Airport, estimated to increase capacity by an additional 8 million passengers each year. This is in addition to a second Beijing airport, scheduled to be complete by summer 2019, consisting of 7 runways and a capacity of 72 million passengers annually.

While all other Asian countries are seeing infrastructure investment, it is certainly not at the committed rate China is setting. For now, it appears other emerging economies throughout Asia, are in a constant game of catch up with China, and no countries are yet able to catch up. That is not to say it is impossible, but at least in the short term, China is proving to be too committed, and other countries appear to not be quite at the same level yet.

Conclusion

In summary it is clear that many Asian countries do pose some threat to the economy of China. A credible threat that should not be ignored. Overall, it appears China will be losing out in the low cost manufacturing sector. India has particularly shown their dedication to increasing their share in this sector, announcing various incentives, including cuts in corporation tax and substantial subsidy’s.

This will certainly result in an increase, with estimates setting India’s manufacturing potential at up to $1trillion by 2025. However, this is perpendicular to where China wants to be. Instead, as mentioned, they are hoping to shift away from manufacturing to being more reliant on services. An industry sector economists believe is an essential driver to growth. Coupled with China’s investment into infrastructure, the nation’s already substantial supply chain network, as well as increase in high-tech manufacturing, the loss of low cost manufacturing may not be quite the blow as it first seems.

That is not to say the future for China is smooth sailing, they do have many issues to navigate, as changing the economy from manufacturing based to consumption based is no easy challenge. However, throughout the last decade, the government has shown to be committed to ensuring growth is continued. Overall though, the threat of other Asian countries, may not be too big of a concern for the time being.