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From the Desk of the Executive Director

Ken Phillips is co-founder and Executive Director of Independent Contractors of Australia. He is a published authority on independent contractor issues and directs research on related commercial and trade practices issues. Through his numerous articles in newspapers and think-tank and academic journals, Ken is known for approaching issues from outside normal perspectives and is frequently sought out for media comment.

There’s no stopping China

Sunday, December 01, 2013

ICA board member John Findley has been doing business in China continuously for some 30 years. He’s been saying for ages that China’s growth is not going to stop. Here’s my analysis from a recent conference in Macau.

All those Western market analysts who are worried about, and reacting negatively to, the ‘slow down’ in China perhaps need a good lesson in reading Chinese economic tea leaves. I received such a lesson in Macau last week when attending the International Small Business Pan Asia Congress.

Speakers from Hong Kong, Macau, Taiwan, Korea, Japan, Indonesia and Malaysia all knew one heck of a lot about China. All were discussing how their region, Asia, under the shadow of the colossus of China, is surging economically—dominating global growth now and set to do so throughout this century.   

The speaker who brought the scale of this economic surge to the forefront was a Mr Li Zhi Bin, Chairman of the China Association of Small and Medium Enterprises. Mr Zhi Bin described in some detail the significance of the Chinese Communist Party’s recent Congress and the Plenary Session held on 12 November which, he said, most observers had ignored.

He described the series of announcements and papers from these peak CCP events as being the most significant in 35 years, since the time of the opening up of China by Deng Xiaoping.

The aim, he added, of the CCP is a fully-fledged market economy by 2050 being ‘wealthy, democratic and socialist’. ‘Wealthy and socialist’ are probably easy concepts to grasp, but who knows what the idea of ‘democratic’ means within the framework of CCP thinking?!

According to Mr Zhi Bin, the CCP has accepted that the economic dominance of the government sector and government commercial enterprises is interfering with the goal of a market economy which in turn is suppressing innovation. One of the six pillars of this CCP reform programme is to rebalance government with the market in China.

Other China observers treat such statements with some caution, claiming that the CCP has a history of overstating and under-delivering. Nonetheless, close attention should be paid. Deng Xiaoping’s reform statements of 35 years ago were probably treated with scepticism at the time. And certainly, over time, the CCP has delivered for China what was promised.

Which leads us back to the issue of China’s economic size and growth. Growth has dropped back to 7.6% pa, a figure which appears to cause concern for some economists and analysts. Mr Zhi Bin says this is hardly a ‘hard’ landing and other facts are needed to grasp the real picture.

China’s GDP in 2012 was RMB 52 trillion, almost double the size of 2007 and 4.3 times the size of 2002. In this much larger economy, China’s growth this year is around $US 600 billion, 33 per cent larger than 2002, and double that of the USA’s growth for this year. On these facts, this hardly looks like a ‘slowdown’ but rather a continuing boom.

Add to this the fact that 60 per cent of China’s population is now urbanized—up from 20 per cent some 30 years ago. Given that this figure could conceivably rise to 80–90 per cent, that leaves 340 million more people yet to be urbanized (on the basis of current population figures). That heralds a sustained boom in any language and probably explains Mr Zhi Bin’s statement that China will import $US10 trillion worth of commodities in the coming decade.

For Australia, this is startling. The current Australian debate is about what to do now that the resource boom is allegedly coming to a close. In the light of these Chinese figures, such discussion sounds foolish.

If there is an end to the resources boom, it’s because Australia has priced itself out of the market. The 35 per cent increase in the cost of Australian resource project construction in the last five years has made much of Australia’s minerals resources unviable to extract. A major priority of the Abbott government must surely be to push these construction costs back to reasonable levels. Any resource boom shutdown looks more like a self-imposed outcome than a result of declining potential demand.

The figures presented by Mr Zhi Bin were the backdrop to his comments on the Chinese small business sector, the focus of the Pan Asia Congress.

As is standard across the globe, small and medium enterprises (SMEs) make up more than 90 per cent of private companies in China. These 35 million registered businesses contribute 60 per cent of GDP, account for 50 per cent of tax revenue, hold 65 per cent of patents and produce 80 per cent of all new products. And they are recognized as the most significant of social stabilizers because they employ 80 per cent of the workforce.

A little while ago an Independent Contractors Australia member with more than 30 years of doing continuous business in China made an important observation. He said that the CCP knows that its hold on power is dependent on delivering continuous economic growth and prosperity in China.

If that’s so, the new CCP economic reform programme can be understood within a CCP self-interested political motivation. Big business, particularly government-owned and controlled business, concentrates wealth. Small business is both the major driver of economic growth and broad wealth distributor in any society. Conceptually the CCP must both enable economic growth and ensure that wealth is spread throughout the Chinese population. Enabling small business therefore becomes critical to the CCP.

This message seemed to come through (by implication) in the comments of Mr Zhi Bin. SMEs, he said, are key to the rebalancing of the private sector with state-owned enterprises. Reforms are to proceed for SMEs in areas of legal treatment, access to resources (particularly finance), approvals processes and much more.

Specifically these include creation of SME-syndicated loans and bond arrangements, a third party credit rating system, an SME development index and the central government working with local governments to ease the burden of regulation. These specifics reveal that, even with the massive growth of China over the last decades, its transformation from closed communist state to a functioning market economy continues to be a significant journey.

Perhaps the message to those who express caution about China’s leaders overstating their reform intent is this: we need to remember that the sheer size of China means that reform programmes take a long time to travel throughout the economy.
Comments
Ron Hayward commented on 02-Dec-2013 11:13 AM
As someone who has worked for Chinese businessmen in SEAsia in the 70's and 80's I would say that one of the most significant economic drivers is the worldwide but especially SEAsian Chinese community in each country which is at the forefront of their adopted countries business. There extended family and work ethic together with the recycling of their older family members into continued but changing work within the family business has great social benefits in terms of the aging population, the cost of health. We owe it to our children but especially grandchildren to keep working and contribute because the old saying of with age comes wisdom is not to be forgotten in todays "give me" society.

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