China’s push to raise wages good for Asean

KUALA LUMPUR: The move for China’s economy to domestic-driven from
export-dependent is imminent, and this will create new opportunities for
Asean countries, including Malaysia, that lost out to China in the
production race two decades ago, said the honorary chairman of the
International Chamber of Commerce (ICC) Victor Fung.

“If you want
the lowest cost you don’t go to China anymore,” said Fung in an
exclusive interview with The Edge Financial Daily yesterday, adding that
the myth of the “China price”, or cheap consumer goods from China, was
no longer true as the country’s labour market has undergone a
fundamental change in the last two years, prompting the need for a
change in the Chinese economy.

There are probably not many
people who understand China’s commerce better than Fung, ranked by
Forbes magazine as one of the top 40 richest people in Hong Kong. He is
chairman of outsourcing giant Li & Fung group (market cap HK$169
billion), controlled by his family, which sources clothes and consumer
products from mainland China and supplies to US-based retail giant
Wal-Mart Stores Inc. Put simply, Li & Fung is one of the bridges for
trade between China and the rest of the world, especially the US.

In
the last three decades, since opening its doors to the world, China’s
spectacular rise to the world’s second largest economy has bestowed on
it the often unfashionable moniker of being “the world’s factory floor”.

But
following the global financial crisis in late 2008, which saw demand
from the US weaken considerably, Fung said China finds its economy at
risk if it were to remain dependent on external demand, nor does it want
to remain at the lower rung of the global supply chain, letting others
take a bigger slice of the pie.

The shift from its current
economic form is imminent. In the recently announced 12th five-year
plan, China’s top leadership stated the aim to move the country from
being a producer to a major consumer. Under the plan, launched last
October by the Communist Party’s central committee, China will boost
domestic demand and seek to maintain balanced economic development.
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Few people understand China's commerce better than Victor Fung.

According
to China’s Xinhua news agency, the policy document set targets for the
next five years, which include plans to maintain stable and relatively
fast economic growth, achieve strategic restructuring of the economy and
more importantly, raise average household incomes at an even faster
pace to boost internal demand.

In general, China’s measures to
grow domestic demand range from policies to create over 45 million jobs
and move 40 million rural labourers over the next five years, news
reports said.

To move up the value chain, Xinhua also reported
that China has committed to developing seven new strategic industries
with favourable policies in the next five years. The industries are
information technology, energy saving and environment protection, new
energy, biology, high-end equipment manufacturing, new materials and new
energy cars.

These measures support the long-held view that
China’s export-driven growth was not sustainable in the long term and
that it was timely for China to beef up domestic demand and move up the
value chain.

“China’s shift in overall economic policy to
emphasise imports and local consumption over exports will create a huge
opportunity for neighbouring countries, particularly the Asean region,”
said Fung.

“In the short term, companies looking for a bargain
could move away from China to cheaper manufacturing nations such as
Bangladesh and Asean countries like Vietnam, Cambodia and Indonesia.
However, this does not mean China will no longer be the world’s
preferred location for manufacturing,” he added.

Fung believed
that China’s export competitiveness will likely return over time if
China-based manufacturers are able to compete, not on price as it always
had, but on other factors like productivity, quality or scale of
operations.

China is currently the single largest producer in the
world, making a range of products that include textiles, clothing,
electronic devices and components. However, its current manufacturing
tends to be concentrated on labour-intensive, assembly-line operations.
Many market observers noted that Chinese firms need to beef up their
research and development (R&D) and intellectual property ownership.

But will China’s induced appetite be able to sustain its government’s push towards more imports and internal demand?

In
response, Fung asked: “Can the Chinese people consume twice as much
overnight? The answer is no.” However, he said China’s domestic
consumption is expected to grow steadily, owing to the increase in
spending by the younger and more affluent Chinese as well as China’s
urbanisation policy. And as this happens, there will surely be spillover
demand for certain products or services that Asean countries could
provide, if they could position their offerings correctly based on the
countries’ niche and expertise.

Fung told a press conference
yesterday that the availability of international trade financing had
become a crucial factor in the global movement of goods.

“As the
supply chains become more global and sophisticated, every stage of
production and movement of the goods requires financing.

“International
financing is inseparable from international trade. The availability of
trade finance will dramatically affect the movement of trade,” Fung
said after opening ICC Malaysia’s seminar on ICC’s Incoterms.

Incoterms
(International Commercial terms) is a series of rules, devised and
published by the ICC, widely used in international commercial
transactions.

Fung also said there had been increasing emphasis
on protection of intellectual property as a key consideration in the
global supply chain, given that manufacturing is often dispersed across
several countries.

“End-to-end supply chain used to mean from raw
materials to consumers. Now, end-to-end supply chain can be interpreted
as from idea to consumer,” he said.


This article appeared in The Edge Financial Daily, April 6, 2011.