China: Still High Risk, High Reward

In a presentation at the Manufacturing Perspectives media event at Rockwell Automation’s Automation Fair, Cliff Waldman, global economist for the Manufacturers Alliance/MAPI, a business research group, told his audience that the high-reward, high-risk scenario remains firmly in place for American companies in China.

China is still an economic powerhouse, but its economic future is a complex one. Its rising wages—caused by rising education levels and continued migration of younger workers to the more developed regions—means that the original attraction of foreign investment due to cheap labor is officially over. “Wage acceleration is part of a broader trend that suggests that China will no longer be the low-cost competitor in Asia.” 

That fact may have a delayed impact, however. Waldman says that spending on the 2008 Olympics is masking some weaknesses in overall investment. He also fretted about an investment bubble that is unlikely to sustain itself, given the noticeable reduction in new construction. “Declining savings rates and labor supply will likely have a negative impact on capital flows and foreign direct investment,” he said, however, his studies also indicate that the Chinese consumer currently plays a larger role in the economic engine than previously thought.

He went on to say that China’s continuing large trade surplus has much more effect on economic growth in the rest of Asia than it does in threatening North American and European manufacturers, although there’s clear growth in the export of machinery and transport equipment to those regions.

For American companies, Waldman believes opportunities in China are greatest in environmental technology development and implementation and in medical technology development to support what is becoming a fast-aging society. Other opportunities include investment in R&D on sophisticated infrastructure, such as computers and energy, as China’s middle class and consumer base continues to grow.

The risks are embedded in those environmental and health issues—particulary worrisome in an aging society.

"China might actually grow old before it grows rich,” he speculated. Both these issues will demand change, says Waldman, suggesting that China’s current government might resist those changes.

In addition, costs in China are rising everywhere, and intellectual property concerns are still very real. “China has the appropriate laws to control the intellectual property problem,” said Waldman. “Enforcement is something else.”
Finally Waldman reminded the audience that with the type of rapid societal change that defines China today, the risk and concerns about social and political issues are not to be taken lightly.

“The Chinese consumer has the potential to be a major force in the global economy,” concluded Waldman. “But the full potential of the household sector will not be realized until China rebalances away from excessive investment growth, which will occur during a period of slower economic growth. Thus China’s long-term economic growth potential will likely slow.”