Small motors drive big engine
Raymond Zhou
2004-04-22

China is not one big economic behemoth growing at 8-9 per cent a year, but rather a series of regional economies.

If you look at it province by province, you will discover up to 100 economies loosely coupled together some galloping at breakneck speed while others lagging a little further behind, according to Professor Michael Enright from the University of Hong Kong.

Enright emphasizes that China is top dog in terms of opportunity.

"Everywhere in the world, companies are trying to figure out how to take advantage of opportunities in China, or how to deal with what some perceive as threats," he says.

China's emergence

Enright says that, as China takes up a new industry, before long it becomes a dominant force.

He cites an example of Como in Northern Italy. It used to produce 50 per cent of the world's raw silk, but now China accounts for 95 per cent of the total, according to the latest available data, which is for 2002. Como has dropped off to 2-3 per cent.

Another example is the garment industry, controlled by the quota regime. What will happen after 2005 when the World Trade Organization rules end all quotas? Enright offers a glimpse: If you isolate a few of the garment categories where the quota regime has not been constrictive, you will see that China has around 45 per cent of the world's export share.

Therefore, he predicts that China will have such a market share in garment exports when all quotas are lifted.

What is more surprising, for Enright, is the fact that this trend applies even to those industries traditionally not affected by globalization.

Furniture manufacturing has always been a local or national industry, he says, because shipping bulky furniture is simply too costly.

But in the last three years, employment in the US furniture industry has dropped approximately by one-third, which can presumably be attributed to the export-oriented industry in China, according to Enright.

He explains that most of the exports come from just one city in one area Dongguan in Guangdong Province.

Enright cautions that one should not attribute China's competitiveness exclusively to its currency. Even if the yuan is floated, he argues, China's industries would not weaken in world export markets in any fundamental way.

Many Western economists, as well as the media, miss the point when they blame everything on the yuan, he says.

Regional disparity

While the outside world tends to see China as one big juggernaut, a closer look shows that things are quite different.

How did China become one of the world's top trading nations in just 20 years after being cut off from the world market for so long, asks Enright.

It is a continental economy, which should depend on a network of infrastructure for fast growth. But China did not start out by building such a network. The vast majority of growth has come from three regions, which are all within 300 kilometres of the coast.

The Greater Pearl River Delta, the Yangtze River Delta and the Bohai Rim region, combined, make up only 3 per cent of the nation's land mass and 20 per cent of the population, but 45 per cent of the gross domestic product and over 70 per cent of international trade and investment.

These areas have essentially middle-income purchasing power by world standard. But 50-60 million people are still a fraction of 1.3 billion. If you move inland, even just one province away from the coast, says Enright, the "export profile" drops precipitously.

"Therein lies the challenge, not only for China's leadership, but also for people trying to do business in China," he said.

In terms of economic policies, the trend of decentralization in the last 10-15 years gives more autonomy to local administrations.

State-owned enterprises started to be responsive to market needs. The central government, says Enright, now manages by exception rather than by rule, focusing on the crucial areas that need its attention and leaving more economic decisions to the devices of local governments.

This has improved local management in many cases, but has also created a dynamic for local protectionism, which sometimes makes it difficult to trade between provinces more so than trading between countries.

For a foreign company, operating in China usually means emphasis on one or more of the three coastal regions. Even the typically successful China strategy has generally not scaled, replicated or been rolled out across the entire nation, he says.

Regional disparity has also dictated that companies may not be able to manage from a single office. Nowadays, many multinational firms set up multiple offices in regional hubs in order to calibrate their management for the specific needs of regional markets. Managing by "remote control" from a Hong Kong office is a thing of the past.

Moving ahead

Enright acknowledges that uneven development is the big challenge facing China today. But he says it could not have been addressed earlier.

China is too vast to be developed in a uniform fashion, he says. The step-by-step change first the Pearl River Delta, then the Yangtze River Delta and the Bohai rim region, and now the northeastern rust belt and the western hinterland makes sense.

"It is a natural progression," he says, "because China has to start somewhere. If it waits until the whole infrastructure is fully developed or makes sure everyone moves ahead at an equal pace, China would not have got so far in such a short time."

Enright admits that this policy has left some people behind, but the current policy to raise rural income will address much of the problem.

As for the gap between coastal and inland, and urban and rural regions, Enright says that the richest region is 8-10 times wealthier than the poorest of comparable size in China. While in the US, the ratio is around 1.5. If you take away Manhattan, the average income in New York is not several times more than the poorest region in the US. However, this disparity is misleading. It does not take into account purchasing power parity, for instance.

Another factor, which James Leung, China Daily Hong Kong Edition's executive editor, brings up, is the incompatibility between developed nations like the US and developing ones like China.

"One should compare today's China with Japan in the 1960s or South Korea in the 1970s," he says. Enright, for his part, feels the real rich-poor difference is about 5 or 6-1.

The asymmetry in China's regional development makes it extremely difficult to implement a uniform national policy, argues Enright.

He feels monetary and fiscal policies will have to be tailored for each region. The nationwide infrastructure that is being built will certainly smooth out some of the unevenness. New urban clusters will emerge.

For a foreign company, it has to be alert to this trend and the urbanization that comes with it, such as which city will have its population grow from 1 million to 4 million in the next few years.

Overall, China's economic growth is healthy and the issue of unbalanced development is being addressed, says Enright. It will take some time before results come through.

 
Copyright 2004 by Chinadaily.com.cn All rights reserved.