Economic Overview of CHINA
China responded quickly to the global economic downturn in 2008 and, as a result of a combination of monetary, fiscal, and bank-lending measures China’s GDP grew 9.2 percent in 2009 and an impressive 10.3 percent in 2010. Projections are for the GDP growth to slow slightly in 2011 to between 9 and 9.5 percent.
Accompanying the rise in China’s GDP, U.S. exports to China increased in 2010 by over 32 percent to almost $92 billion. Of course, China’s exports to the U.S. also increased by 23 percent, leading to a balance of trade deficit of $273 billion. After falling in 2009, the trade imbalance with China is now on the rise again. China remains the U.S.’s second largest trading partner after Canada.
After near zero percent inflation in 2009, in 2010 consumer price index rose 3.3 percent, exceeding the authorities’ target of 3.0 percent. Inflation reached 5.1 percent in December 2010, alarming authorities who undertook a multipronged effort to bring real estate prices, food prices and monetary liquidity driven by bank lending under greater control.
Inbound FDI rebounded after a dip in 2009, rising 17.4 percent in 2010 to almost $106 billion. China is the world’s second largest recipient of FDI after the United States. China stands as the world’s third largest market for luxury goods behind Japan and the United States, and some studies estimate that there are now more than 200 million Chinese citizens with a per capita income over USD 8,000. Over the next several years, most economists predict a surge in the number of people achieving true middle class status.
Despite these remarkable changes, China is still a developing country with significant economic divisions between urban and rural areas, albeit one with vast potential. The numbers of migrant workers continues to remain high, with the number of laborers employed outside their hometowns at approximately 150 million in 2009. This number has appeared to remain static, however, with some areas, especially in the East, reporting shortages of such laborers and tightening wage situations. As of 2010, the per-capita disposable income of urban residents was RMB 19,109 yuan (USD 2,895), and the per-capita disposable income of rural residents stood at RMB 5,919 (USD 897).
In addition to the large multinationals which continue to earn impressive returns on their exports to and investments in China’s market, American SMEs are also active here. FCS counsels American companies that to be a success in China, they must thoroughly investigate the market, take heed of product standards, pre-qualify potential business partners and craft contracts that assure payment and minimize misunderstandings between the parties. Stumbling blocks foreign companies often run into while doing business in China can be grouped into these broad categories:
• China often lacks predictability in its business environment. China’s current legal and regulatory system can be opaque, inconsistent, and often arbitrary. Implementation of the law is inconsistent. Lack of effective Chinese government protection of intellectual property rights is a particularly damaging issue for many American companies. Both those that operate in China and those that do not have had their product IP stolen by Chinese companies.
• China has a government that, in some sectors of the economy, could be called mercantilist. China has made significant progress toward a market-oriented economy, but parts of its bureaucracy still seek to protect local firms, especially state-owned firms, from imports, while encouraging exports.
• China retains much of the apparatus of a planned economy. A five-year program sets economic goals, strategies, and targets. The State and the Communist Party directly manage the only legal labor union. The understanding of free enterprise and competition is incomplete in some sectors and political connections or goals at times trump commercially-based decisions.
• Certain industrial sectors in China are prone to over-investment, leading to overcapacity, over-production, and declining prices in affected industries.
Continued economic reform is essential for China to achieve high levels of economic growth. China’s own leaders recognize a more balanced economy relying more on domestic demand and development of the service sector are essential for China to become a mature economic power. However, companies must deal with the current environment in a realistic manner. Risk must be clearly evaluated. If a company determines that the risk is too great, it should seek other markets.
The growth of imports from the United States in many key sectors, such as energy, chemicals, transportation, medical equipment, construction, machinery and a range of services, suggests that China will remain an important and viable market for a wide range of products and services. With growing numbers of Chinese traveling abroad for education and leisure purposes, China’s contribution to U.S. educational institutions and the tourism industry is increasingly important as well.