Investing in China
PART 4: The world's fastest growing economy is not without its challenges, but Beijing's demonstrated interest in addressing the nation's issues sends encouraging signs to China's investors and trading partners.
China's phenomenal economic development is expected to remain on track for the foreseeable future, but the Asian tiger is not without its challenges. Among them is the government's need to deal with the rising social and economic disparities between China's urban and rural populations, a somewhat paradoxical trend fuelled by China's continuing economic success.
Even though better living standards depend on continued economic growth, the Chinese government's strong focus on the economy is now being tempered by the realization that the social costs of growth, such as widening income gaps and environmental degradation, need to be addressed, says Mark Bolger, Export Development Canada's senior advisor for Asia. He says particular emphasis is being placed on improving conditions for rural citizens through tax reform, social spending and punishing corrupt practices by local officials.
According to official data, approximately four per cent to five per cent of China's 1.3 billion people are considered middle-class, which describes households that earn 2.5 times China's average income. Authorities estimate that by 2020, however, more than half of China's families will be middle-class, with 78 per cent of them living in cities.
EDC reports note that in spite of some policy-induced economic tightening, business activity in China remains robust and shows few signs of abating. Authorities are not expected to significantly modify the three main pillars of China's economic development strategy - urbanization, industrialization, and greater openness to trade and capital flows. This means that China should be able to maintain a solid 10 per cent growth trajectory going forward.
From an investment perspective, China is a massive market with the potential for considerable upside, says Mr. Bolger. The downside, he says, is picking the wrong sector to invest in, which could be one that the government does not necessarily want to encourage.
For investors who select the right sectors and understand the complex Chinese market, however, the benefits can be considerable. EDC says data for most of 2007 confirm that China is succeeding in boosting domestic growth. However, adjusted for inflation, retail sales growth softened towards the end of the year.
While noting the current economic climate in China remains very positive, Dr. David Fung, chair of Canadian
Manufacturers & Exporters (CME) and chairman and CEO of Vancouver-based ACDEG International Inc., says, "The government's big challenge continues to be ensuring stability that is threatened by the wealth distribution gap between the urban and rural communities."
Chinese authorities are responding to the challenge in part with a policy of more open public consultations and rapid urbanization, and are currently building 40 new cities that will each accommodate over one million people. "The question is can they do it fast enough," says Dr. Fung.
Mr. Bolger says while it is difficult to say exactly how the slowdown in the U.S. economy will impact China - which exports a significant percentage of its manufactured goods to America - he doubts that it will be significant due to China's success in diversifying its domestic and export markets.
Dr. Fung agrees. He says China is now strongly integrated into the East Asian regional economy. "For example, China - not the U.S. - is now Korea's number one trading partner, and trade between Japan and China is increasing rapidly."
For foreign investors, China's complicated and highly personalized commercial environment remains a major challenge. In spite of progress towards reforms aimed at encouraging foreign investment by developing a more rules based business environment, China still suffers from a lack of effective legal protection for investors and intellectual property rights, inconsistent application of regulations, and corruption and bureaucratic meddling.
Motivated to continue its successful trajectory, the Chinese government is demonstrating an interest in addressing the nation's issue and improving its public image. For example, while the government is reportedly taking steps to suppress dissent that may arise during the looming Beijing Olympic Games, it is also working to improve its international image in the lead-up to the event. In general, compared to 10 years ago, the Chinese government is more comfortable discussing its policies, yet another sign of encouragement to China's investors and trading partners.
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