Double drivers for economy

The strategy adopted by the US and other developed countries to relaunch their manufacturing sector is, to a large degree, targeted at China and other emerging markets. Under such a strategy, they have begun a new wave of setting up research and development centers in the Chinese mainland. Statistics from the Ministry of Commerce indicate that more than 480 of world's top 500 enterprises have established subsidiaries in China, and nearly 1,000 research and development centers have been set up. In 2010 alone, an additional 194 research and development centers were set up by foreign investors. More overseas companies have chosen to transfer their research and development departments here because of the enormous consumption potential.

China is now the world's largest manufacturer, with its manufacturing volume accounting for 19.8 percent of world's total. However, its research and development input into manufacturing is less than 3 percent of the world's total. China's industrial manufacturing and innovation capability is generally at a comparatively low level and the international competitiveness of its technology and knowledge-intensive industries is weak compared with technology and knowledge-intensive industries in developed countries. There is still a wide gap between China and developed countries in terms of their industrial productivity. Many of China's traditional industries are still plagued by "impoverished growth". For example, China's industrial productivity and ability to create added value are 4.38 percent that of the US, 4.37 percent of Japan and 5.56 percent of Germany.

Besides, China's long-held advantages for maintaining a high capital return ratio is expected to gradually vanish over the next decade. The imbalance in its labor demand and supply relations will further fuel increases in its labor costs. Despite wages being lower in China than the US, the ever-narrowing wage gap between them has prompted the US to adopt a localized strategy to relaunch its "lost" manufacturing. According to the Boston Consulting Group, China's wages, if priced in the US dollar, are expected to rise 15 percent to 20 percent year-on-year, faster than the growth of its productivity. The gap between labor costs in China's coastal regions and some of the states in the US will narrow in the years ahead. China's advantages will further narrow if the US' lower energy costs as a result of its exploitation of shale gas are taken into account.

China's manufacturing faces gloomy prospects as a result of the re-industrialization strategy being implemented by the US and other developed nations and an accelerating manufacturing development in other emerging countries. Signs have emerged that labor-intensive industries have accelerated their transfer to Vietnam, India, Mexico and some East European countries where low-cost advantages are more obvious. Due to their lower costs, products made by India, Mexico and the member countries of the Association of Southeast Asian Nations are starting to replace the "made in China" brand.

Although China's enormous consumption potential can serve as a new driving force for its economic growth, increased technological input aimed at achieving some technological breakthroughs and realizing technological and product upgrading should be prioritized in the country's economic transformation. A robust domestic demand and a prosperous manufacturing sector together can help China maintain its comparative advantage and ensure its sustainable growth over the next decade.

The author is an economics researcher with the State Information Center.

(China Daily 12/12/2012 page8)