[photopress:zones_chinese_factory_workers.jpg,full,alignright]How the advent of special economic zones turned around the economy of China and why, inevitably, inexpensive goods will become more expensive.
Commentator and investment strategist Andy Rothman says economic development pushed by Beijing will be great for Chinese workers and the environment, but now all of us, that is the customers in the non-Chinese part of the world, will have to pay part of the cost.
In an excellent commentary the article shows that if China is to improve its standards for its people and, global warming and pollution the simple other end of the equation is that goods will cost more.
To illustrate the way in which this will happen he went back to the first wave of economic restructuring, in the 1980s which saw special economic zones established on the coast, where cheap labor fueled foreign-invested factories.
Soon inexpensive goods flooded into the US. This pushed down prices and restrained manufacturing wages.
He said that the second wave, in the 1990s, was the transfer of economic power from state-owned companies to entrepreneurs. ‘It was a process symbolized by China’s decision to join the World Trade Organization. Over a six year period, 46 million state sector workers, the equivalent to Germany’s entire work force, were laid-off in China. The private sector grew fast enough to pick up the slack, and now contributes a surprising 70% of China’s GDP.’
Now we come to the third wave which he confirms is just getting under way. It is an effort to push China’s manufacturing platform up the value-added chain.
He said, ‘Today, most of China’s exports are just assembled from imported components, and Beijing is hoping that in the future, more of the profit-creating parts will actually be made in China. The government is raising the minimum wage and enforcing environmental regulations. It’s also eliminating subsidies for the export of low-value, dirty products ranging from leather to toys, and steel and chemicals. This doesn’t mean China will quickly go high-tech, but Beijing is saying it no longer wants to be the world’s sweatshop for junk.’
All of this is great for Chinese workers and the environment, but it also means that the global deflationary impact of cheap Chinese goods is coming to an end.
Now all of us will have to pay part of the cost of higher Chinese wages and limits on overtime, and as Beijing enforces pollution controls, we will all have to start paying part of that expense, too.
Andy Rothman is with CLSA Asia-Pacific Markets which is an investment firm in Shanghai.