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'Made in Albania': How globalisation is creating challenges for China

05 December 2017 | Markets and Economy

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Qian Wang

Commentary by Qian Wang, Vanguard Chief Economist, Asia-Pacific

Earlier this year I moved with my family from China to California to begin an exciting new chapter of our lives.

This isn't the first time I've lived in the United States. I came here in 1997 for my postgraduate program and I stayed in the States for six years.

Return to sender

Last time, on visits back home to China, friends and relatives always expected me to bring gifts. Back then, as a student, I was on a limited budget so I went to places like Walmart, but pretty much everything I bought was made in China, particularly after China's accession to the World Trade Organisation in 2001.

That made it a little difficult to buy American gifts. People in China asked me why I brought them something all the way from the US that was actually made at home!

But this time around, I've seen country of origin labels from all sorts of places in the shopping malls – not just Vietnam, Indonesia and Sri Lanka, but also Latin American countries like the Dominican Republic and even emerging European economies like Albania and Hungary.

So what's happened over the past 20 years?

One key trend is increasing globalisation. As the world's factory, China used to dominate global manufacturing, but in recent years we've seen a boom in global trade with supply chains extending to all corners of the world. And as China has become more expensive, manufacturers have looked for ways to lower their costs.

Another trend is technological change. We're all increasingly familiar with self-checkouts at supermarkets. But self-service powered by technology is spreading. I recently went to Washington, DC, on a work trip and there was no one at the hotel reception desk at night. I just punched in my details and received the door key – it was all automatic.

Adding more value

In the US, these twin drivers of globalisation and technology are combining to reduce pressure on inflation and increase choice for consumers. But back home in China they are creating challenges for policymakers.

Exports have traditionally been a big driver of growth in China. Before the global financial crisis (GFC), net exports were about 8% of GDP. That's come down over the past decade to 2%–3%*. While this is partly due to the post-GFC weakening in global demand, it's also because China is losing its competitiveness in low-end manufacturing.

Over the past ten years, China's currency has appreciated, and labour and lender costs have risen significantly.

So as the era of cheap labour comes to an end in China, the challenge is for China to move up the value chain, not by making shoes or clothes or lower-end electronics but by building more critical parts of products.

Look at the way iPhones are put together. China exports iPhones but most of the value-add doesn't happen in China. Instead, China imports the parts from Taiwan and South Korea and assembles them. So China really doesn't gain as much as it could.

While there are encouraging signs, with higher-end machinery exports increasing as the share of clothing and textile exports come down, there's more work to do.

China's original transformation from a low-income to a middle-income economy was powered by cheap labour. But now, to escape the middle-income trap, the key is to innovate and be more creative like neighbours Japan and South Korea.

Spoilt for choice

Looking to the future, protectionism is still a concern as the US renegotiates trade deals. But meanwhile we're likely to see globalisation continue as manufacturers look around for lower costs, depressing global inflation in the medium term and giving central bankers a challenge to reach their targets.

And it means that next time I go shopping in my new hometown in California, I'm likely to continue to be spoilt for choice.

* Source: China Customs.

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This article is directed at professional investors and should not be distributed to, or relied upon by, retail investors.

This article is designed only for use by, and is directed only at, persons resident in the UK. It is for educational purposes only.

This article was produced by The Vanguard Group, Inc. It is not a recommendation or solicitation to buy or sell investments.

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Opinions expressed in this article are those of the author and may not be representative of Vanguard Asset Management, Ltd.

Issued by Vanguard Asset Management, Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

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