Miscellaneous / China’S Approach To Improve Its Industrial Efficiency

China’S Approach To Improve Its Industrial Efficiency

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Autor:  anton  19 July 2011
Tags:  Chinas,  Approach,  Improve,  Industrial,  Efficiency
Words: 1253   |   Pages: 6
Views: 1045

Due to the current period of transition, China is in particular need of continued economic growth. While the nation has many complex internal problems and lack of political freedom, the Chinese people believe that continued economic growth would alleviate their problems and hope that the current path of growth will continue for the coming decades. The CCP also recognizes the political importance of economic growth and tries to maintain its growth rates.

However, China’s economic growth is also a controversial issue. Some people argue that it is not sustainable and one key basis for such a rationale lies in its inefficient economic structure. For example, while China’s GDP in 2005 was only one-seventh that of the United States, its consumption of primary energy was half of the U.S. level. Low efficiency incurs relatively high costs to produce a unit of goods and high costs lowers the competitiveness of Chinese goods in global markets, eventually risking stable economic growth.

The government of China also recognized the danger of inefficient economic structure and tried to enhance its efficiency in industrial sectors by using diverse policy options. By and large, it relied on the five approaches: 1. inducing foreign direct investment and allowing quasi-free competitions with domestic firms; 2. buying foreign firms to acquire skills and technologies; 3. allowing minor equity ownership to foreign strategic investors; 4. voluntary restructuring of inefficient sectors; 5. Providing business environment for efficiency build-up through macroeconomic polices. In this essay, each of the government approaches will be introduced and examined in terms of their effectiveness.

I. Foreign direct investment and subsequent competitions with domestic firms

China induced foreign direct investments from international companies by offering tax incentives and other benefits starting in the early 1980s and multinational companies set up joint ventures with domestic Chinese companies. While international companies decided foreign direct investment for the benefit of themselves, it offered great benefits to China’s economy. Through the incoming FDI, China could leap as a global manufacturing country and domestic companies could acquire skills and technologies from foreign companies and Chinese workers were trained by joint venture firms.

While some domestic companies could enjoy the effectiveness of foreign companies by investing in joint ventures, other domestic companies had to compete with these foreign companies for their own survival and which enabled them to enhance their competitiveness and productivity throughout this process. For example, China has more than 120 automotive brands and it has been the most competitive automotive market in the world. While Chinese automakers were regarded as a lemon car maker at the beginning of the industry, they succeeded to emerge as quality car makers recently.

II. Buying foreign firms

With the accumulation of capital, Chinese companies tried to increase their efficiency through buying advanced foreign companies selectively focusing on IT, automotive, and other technology-oriented sectors. When they acquired foreign companies, they could have the ownership of the technologies, patents, marketing network, and production skills that the company accumulated for many years, which was a source that helped Chinese firms advance many years in terms of competitiveness.

In May 2005, a Chinese IT company, Lenovo acquired the laptop unit of IBM at 1.75 billion USD and immediately became the number three maker in terms of laptop market share. By this deal, Lenovo acquired the global marketing networks of IBM and purchasing power by the economies of scale. In January 2005, a leading Chinese automaker, SAIC, also bought a Korean auto company, SsangYoong motors at 0.5 billion USD, which is believed to advance SAIC’s entry into the US markets by five years.

III. Opening its equity markets to foreign investors

The government of China recently opened its capital markets to foreign investors to obtain capital for development as well as advanced technology and management know-how. When foreign investors invested significant portion into Chinese companies, they would like to improve the performance of companies in order to maximize the investment value.

The banking sector is a good example. As of 2006, four major banks of China announced their selection of major foreign institutions as strategic investors with minority equity stakes. While the foreign ownership is minor, it is believed that advanced foreign institutions will bring transparency, business knowledge, and risk management system which is at the core of recent and potential future problems for Chinese banks.

IV. Voluntary economic restructuring

The government of China also promoted restructuring of state enterprises to get rid of over-capacity and inefficient production facilities. From the mid-1990s, the government reduced unconditional lending to state-owned enterprises and induced restructuring among SOEs. Many inefficient companies went bankrupt, sold to foreign investors, and acquired by big companies.

In spite of increasing complaints among displaced workers, the government continued the restructuring plan to enhance productivity. On June 30, 2006, National Development and Reform Commission announced the restructuring plan of steel industry aiming to eliminate inefficient plants which are up to 100 million tons in the next five years as well as to modernize steel production mode. On June 2, 2004, China also released the restructuring plan on automotive sector. According to this plan, China will reduce the number of automakers from current 120 companies to less than 10 companies by 2010 through merger and acquisitions.

V. Macroeconomic policies

Exchange rates and the tax rebate system was favored by the CCP to help domestic industries. The stable exchange rates are important to businesses. If they fluctuate significantly, they could incur hard-to-manage costs. For companies exporting and importing from foreign countries, expectable exchange rates are one of the key concerns that determine profitability. The CCP addressed this concern by pegging RMB to the US dollar at 8.28 Yuan per USD starting from 1994. The tax rebate system to exporting companies is another policy which supports domestic companies. While every domestic company paid the value-added tax to the government, tax rebates were given from the government when they export these goods to foreign countries. The policy was adapted to increase exports and increase efficiency through the economies of scales.

Recently, however, China changed its exchange rate system and tax rebate policies. In May 2005, The Bank of China announced that it would give up the quasi dollar-pegged fixed rates and pegged to the basket currencies and allowing freer floating. As a result, the Chinese Yuan continued to appreciate slowly from 8.23 to 7.17. In addition, it reduced the rebate ratios gradually and eliminated export rebate system to low performing industries and agriculture. These changing environment functions to promote the efficiency of industries by exposing them to perfect competition of global markets and many businesspersons also acknowledged the effects into their business.

Conclusions

China has been transforming its economy from a completely rural-based one to a manufacturing-based one during the last 30 years, an accomplishment which western countries achieved over hundreds of years. Due to the compressed and government-led growth, its economy shows unstable aspects. While it grew at unprecedented rates, most of growth came from the economies of scale while the productivity of the economy was relatively low. The same factor was blamed as one of the causes of the Asian Financial Crisis in the late 1990s by Paul Krugman, a prominent US economist.

However, as we have seen above, the CCP has devised meaningful ways to enhance its productivity of industries and they were effective in enhancing competitiveness of domestic companies. Though we cannot fully speculate whether these policies are enough to create a modern efficient industrial platform, it can be said that China has gone through the proper measures to ensure sustainable economic growth.



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