After a slow year and seeming weakness in China’s economic growth, many are looking into their crystal balls to figure out what the export market to China will look like in 2014.
First, let’s take a look at what is happening in China.
After years of relying on exports, infrastructure and big ticket investment projects, the Chinese government is shifting its economic game plan toward consumption-driven growth. This strategy depends on creating enough additional jobs and discretionary income to fuel a consumption-based economic multiplier spiral, e.g. wage earners spend their discretionary income on products and services, which creates more wage earners and discretionary income.
There are a number of challenges to this change.
The effects of the consumption spiral will take time. The only firm number the government is pushing is the creation of 10 million jobs, but while the number is important, the amount of discretionary spending is what drives the cycle. This type of economic strategy also risks inflation, if the created jobs are not accompanied by matching productivity gains. With an aging population, this presents opportunities to those who provide the tooling and automation for efficient factories.
Existing small and medium-sized enterprises, which generate 70 percent of the new jobs in China, are mired in over-saturated, low value, small margin manufacturing and service sectors. In addition, they are facing intense competition from lower wage competitors in Southeast Asia, India, Bangladesh and Pakistan.
China’s overheated real estate markets are facing a correction; how and when it comes are the only questions. There are two main problems: the median house prices are far beyond the reach of median income earners, and local governments are dependent on the per square meter fees they earn on long-term land leases (about 50 percent of their revenues). Simply doing away with the fees would devalue existing real estate, cause a massive loss to existing owners and create a massive gap in local government revenues. The government is very aware of the problem, but the scope, complexity and sensitivity of the issues makes it thorny.
Local government spending and debt are also problems. With debt piled up since 2007, they have been trying to spend their way to prosperity.
Banking and capital markets are of concern. This area is under intense reform by the market-oriented Premier Li Qaicheng, which wants to use the market to price risk into both bank loans and stocks. China is still in the beginning of its financial infrastructure development. Those with the skills and the vision to help the markets work better who are able to negotiate the political environment can do very well.
China has competition between SMEs and SOEs. The SOEs (State Owned Enterprises), due to the fact that they are used by the Communist Party of China to give cadres “business experience,” are a powerful interest group, but as would be expected their performance is underwhelming. They are also one of the main borrowers, which rather than sticking to their core business tend to try anything going, including real estate ventures, resorts, retail, internet, construction, etc.
Corruption continues to be the main headline grabber, with tigers (big fish) and flies (little fish) falling daily. With over 90 million members within the Party and tens of millions of non-Party members within government, control is an issue. The pressure is more intense in China, due to the One Party System, as there is nobody else to blame. Xi Jingping has drawn a fairly clear circle around what is acceptable behavior within the Party and society as a whole. This can be seen in the equal numbers of renegade Party members and dissidents, on the right and left, who find themselves in a difficult situation.
Pollution and food safety: popular pressure and personal experience have put these on the government’s front burner. The people and the Party members breathe, eat, drink and raise their children in the same environment. It has resulted in increased funding for environmental issues such as: soil contamination, which currently affects 20 percent of China’s arable land; water pollution, which affects 40 percent of China’s rivers; and air pollution, which is affecting 80 percent of its cities with population over 1 million. As a result, hundreds of billions of dollars are being poured into environmental remediation and control.
In reaction to some of the issues encountered in trying to build mega-cities, China is changing its economic development template from city to region-centric. Cities will still remain the hub of local development, but added consideration will be given to how areas work together. This will hopefully open doors rather than add bureaucracy.
Li Qecheng is intent on shedding non-productive industrial capacity in areas such as steel, glass and cement. Because these industries are dominated by SOEs, the hope is that they will emerge leaner, more efficient and with smaller environmental footprints. Opportunities will be available to those able to offer cost effective energy and water saving systems, which also reduce pollution to existing facilities anxious not to be axed.
The Chinese government has allowed a number of loan defaults. The point is to prepare companies and lending institutions to start pricing risk into their transactions.
With a rapidly aging population, the number of Chinese people over the age of 60 in 2030 will surpass the total population of the United States today. China has to increase productivity and develop strategies to deal with its elderly population.
Buildings in China use twice as much energy as their Western counterparts. Cost-effective, energy-saving materials and systems that cannot be easily copied are a good bet for the future.
China is still the biggest builder of transportation infrastructure in the world and will continue to be so for some time.
So, what does Wisconsin have to offer China? Wisconsin’s major export industries should do well, even as some exports decline.
The industrial machinery sector should be looking for opportunities to sell to Chinese companies who are retooling to change lines or improve efficiency.
Medical and scientific equipment will continue to be strong performers as China upgrades its health system.
Agriculture and dairy should be taking advantage of China’s increasing appetite for safe foods, cheese and organic foods.
Vehicles (not railway) will be a competitive market in China except for some specialty items such as airport firefighting trucks.
Plastics: As a competitive market already exists in China, those with specialty products will do well and those who are selling a commodity will not.
Electrical machinery will see another challenging year.
Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ, China.org.cn, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News’ Dialogue and the author of “The Kunshan Way,” an economic development history of China’s leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to email@example.com.