Earlier this month during at the National People’s Congress in Beijing Chinese Premier Li Keqiang announced a number of new targets for China’s economy. A 7% GDP growth rate was the figure that worried many news outlets and economic analysts that China’s strength is declining. While it is true that this is China’s slowest economic growth in 24 years, there is no need for fear as Mr. Li’s statements reflect a plan to guide the country’s economy to more stable and sustainable growth.
It’s worth noting that even at a lowered rate of 7%, China’s growth is still the envy of most countries. China may never see double-digit growth again, however the sheer magnitude of growth for this country remains impressive and still of course plays a large role in the world economy. The Economist reports that although the rate is lower, a growth rate of 7% in 2015 for China would generate more additional output than a 14% pace did in 2007. They also point out that the cyclical and policy explanations for this slow down are not at all permanent and that the outlook should improve as the country comes out on top of this cycle. “The target growth rate of approximately 7 per cent takes into consideration what is needed and what is possible,” said Li in a statement regarding his speech in Beijing.
Further investigations by the Economist reveal the strengthening of China’s supply chain. 65% of the components in Chinese made goods made at domestically, which is up from 40% in the mid-1990s. Furthermore, as domestic consumption and demand rises, local firms are producing better-designed and more original products for consumers.
The example of an electronics manufacturer based in Asia displays the competitive advantage China has by hosting more of the supply chain. The company is headquartered in the Philippines and naturally would have preferred deal with manufacturers there, especially as wages and worker turnover are lower in this Southeast nation. However despite this desired proximity, the company accounted for other costs, such as shipping and tax, and deduced that China was ultimately still cheaper due to its cluster of suppliers and buyers.
Onshoring in the US and UK from China would not be a viable solution at this point. Despite the higher wages in China, factories are still much cheaper than domestic factories. Most manufacturers give salaries that are just above the minimum wage, which is 75% less than the cost of an American manufacturer. Moving to another low cost country wouldn’t be the best solution either, as Chinese workers are more efficient than their counterparts in other developing countries. A report by McKinsey found that “labour productivity increased by 11% a year in China from 2007 to 2012, compared with 8% in Thailand and 7% in Indonesia.” Furthermore, as ET2C has pointed out before, Chinese factories are becoming more automated, so therefore there is great potential to improve this productivity rate. In 2013, China became the biggest buyer of automated robots, by purchasing 20% of all those made that year, according to the International Federation of Robotics.
As per our previous articles, the improving logistics and supply chains of inland provinces are attracting large firms to move their manufacturing bases within China. Foxconn, the maker of the Apple products usually depended on the manufacturing hub in Guangdong. However due to lower wages and other incentives, the tech manufacturer now has large plants in Henan and Sichuan. China still has plenty of room for growth in manufacturing, and it is proving itself a more capable manufacturing nation with strong improvements in productivity rates.
There will be more reports regarding a so-called decline in China’s GDP growth rate, however in this decade China’s economic development has entered a new normal. “Our country is in a crucial period during which challenges need to be overcome and problems need to be resolved,” Mr. Li told the National People’s Congress in his official government work report. ET2C remains optimistic and confident in the capabilities of China’s manufacturing capabilities.