31 August 2012

Africa: China Model Begins to Creak

How will China's internal changes affect its overseas ambitions? Dr Sven Grimm, director of the Centre for Chinese Studies (CCS) at Stellenbosch University, and Dr Daouda Cissé, a research fellow at the CCS, discuss.

For the past three decades, China has experienced unprecedented double digit economic growth of 10 percent, made possible thanks to abundant cheap labour and, consequently, low production costs. The low level of the yuan compared to the other major world trading currencies such as the US dollar, the euro and the yen has also helped, enabling China to export cheap consumer goods to the world markets.

But the model is changing. Not only are workers demanding higher pay, thereby increasing production costs, but we also see a relatively slow appreciation of the renminbi. A number of foreign observers point to the 'bicycle theory', which holds that China's economy, and the political system, stays upright only if it remains at a minimum speed (read: growth rate). This might be exaggerated, but while overall growth has reduced the levels of absolute poverty in China, the urban population is benefiting more than the rural; inequalities are rising in what used to be one of the most equitable - and poor - countries in Asia. Nowadays, the Chinese upper class and the growing middle class travel beyond their borders to Hong Kong, Europe, andNorth Americato spend money on luxury tourism and expensive brands. At home, peasants and internal migrant workers struggle to make ends meet.

Even if the regional gap between the coastal (Shanghai, Shenzhen and Guangzhou) and inland (Wuhan, Chongqing and Chengdu) cities is slowly closing, the government is aware of the social disparities. Reforms, such as on wages, working conditions and welfare, are emphasised in the most recent 12th Five Year Plan. China's economic policies focus more on boosting internal growth by bridging the gap between the generation of revenues and their distribution, trying to cater for growing middle class needs. The distribution of water, electricity and land remain urgent priorities.

Yet, increases in wages and labour costs in coastal China have not been favourable to many companies both domestic and foreign in their attempt to sustain profit margins; domestic margins are often slim in the first place. Foreign multinationals have started moving the biggest parts of their operations to China's neighbourhood. Vietnam, Indonesia, or Thailand often offer cheaper labour and production costs. Consequently, Chinese companies have also started 'going out'.

Chinese exporters and trading companies' managers have voiced concern that their exports to other parts of the world have decreased. This is partly an effect of domestic policies, and partly due to the international financial crisis which slows demand for Chinese outlet markets in Europe and the US. Some Chinese entrepreneurs also complain about internal financial reforms. In July 2012, interest rates were lowered to 6 percent in the hope of strengthening China's slowing economic growth. Yet, it becomes increasingly difficult to get loans through Chinese banks. The internal pressure related to these changes inChina's economy is high.

How China navigates the terrain matters for all, and matters particularly to Africa. The shift from an export to consumption-driven economy, which may sustain China's economic growth, will have implications for its growing trade partner. In particular, as labour and production costs in China are becoming expensive, the Chinese factories and city markets in southern and eastern China may not be able to satisfy African consumers' needs for low-cost Chinese manufactured products.

The new leadership has its limitations. There is a lack of charisma in the current generation compared to the first and second generation of Mao Zedong and Deng Xiaoping. The new leadership have an additional disadvantage in their family background. The 'princelings' Xi Jinping and Liu Keqiang will aspire to cast off this label which is damaging them in the eyes of both the old cadres and other young aspirants. They will, however, face strong vested interests from within the state bureaucracy and from state-owned enterprises. This is not an enviable moment to take the helm. Yet, the world is wishing the new leadership well, as any turmoil in China will negatively affect most of the world - be it in the industrialised nations or the developing parts of the globalised economy.

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