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Economist: China’s ascension of global value chain creates opportunities for region
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QUESTIONS about China’s economic slowdown and restructuring efforts are the center of a long-running debate among economists. Among them is Wei Shangjin, chief economist at the Asian Development Bank (ADB).
An alumnus of Fudan University, Wei recently attended a seminar held at its School of Management, where he argued that instead of causing only “dislocations” to the world economy, China’s slowdown has upsides that tend to be overlooked.
Many Western politicians, especially those running for high office, often blame economic woes at home on what they describe as “China shock,” meaning that China’s growth comes at their expense, said Wei. Typical broadsides are that China steals local jobs, pushes up commodity prices and produces below the true cost of goods thanks to handsome subsidies from the government.
Not only are these assertions arbitrary, but they are also becoming out of touch with reality. Wei’s ADB job has blessed him with firsthand insights into changing dynamics of the Asian economy. He pointed out that countries like Vietnam and Bangladesh have been among the biggest beneficiaries of China’s transition.
Vietnam, for example, is now a hot destination for foreign direct investment, especially from South Korea. Conglomerates like Samsung continue to expand their operations in Vietnam, eyeing the cheaper labor there that is vital to labor-intensive industries such as smartphone manufacturing.
And Bangladesh is fast becoming the world’s second-biggest exporter of textiles, filling the void left by low-end Chinese garment producers as they move up the value chain.
And it’s not just China’s quest to become a higher-added-value economy that’s been powering growth in the region. The demand of its citizens is emerging as a key driver of growth in nations like the Maldives, in the form of a surge in tourists from China.
The main narrative about the current Chinese economy, as opposed to where it was prior to China’s WTO entry in 2001, is that the country has shaken off the “world factory” label attached to it. Research conducted by Wei shows that there was a time when China’s labor cost was among the lowest among developing countries. But as its demographic dividend evaporates, China’s labor costs now are on a par with those of Brazil and Mexico. In other words, its traditional low-cost advantage is wearing off.
Four options
He argued that there are four strategic options for Chinese businesses grappling with higher costs: “down, up, out or in.” “Down” stands for closing down, “up” for innovating and moving up; “out” represents outbound investment to lower-wage countries; and “in” refers to relocation from coastal to inland areas. Much of Wei’s research as a professor teaching at Columbia University is centered on the “up” option.
This goes to the heart of the old, somewhat cliched question: “Can Chinese firms innovate?”
While examples abound of Chinese successes in innovation — including mass-produced commercial drones, high-speed train, the Wechat messaging app and cutting-edge Huawei telecommunications equipment — these are often perceived to be a minority, rather than adequate evidence of newfound Chinese strength in innovation.
“What we should look at is whether firms like Huawei are harbingers of something broader,” Wei told the forum. By “something broader” he means a shared desire to adjust the outmoded corporate strategy of competing on cheap labor to one based primarily on rising R&D expenditures. Nothing better illustrates a country’s innovative prowess than the number of patents considered relevant. Official figures cited by Wei show that patent applications in China multiplied 57-fold between 2000 and 2014.
Nonetheless, the world, including many pundits within China itself, has long been skeptical about the quality of Chinese patents. Doubts are cast on the seemingly easy approval of patents and the role of government subsidies in fostering this tremendous growth. After carefully comparing notes, Wei concluded that the ratio of approved Chinese patents to those filed as a whole stands at around 40 percent, which is actually lower than rates seen in the US and South Korea. He thus countered the claims that Chinese patent “explosion” is a result of easy approval.
Another important piece of evidence in his favor is patent citation rates, i.e., the number of citations a firm receives in the subsequent years on all the patents it produces. An increasing number of firms from outside of the US are citing US-registered Chinese patents while seeking to file their patents in the US. This in his opinion is an affirmation of the Chinese patents’ value.
However, there indeed is a misallocation of resources akin to the easy credit lavished on the state sector. Wei discovered that a sizeable portion of government fund encouraging R&D has gravitated toward state-owned enterprises (SOEs). Their output is often low, with most of the patents applications coming from the private sector.
“This demonstrates yet again the need for SOEs to undergo sweeping reforms to enhance their efficiency,” Wei said.
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