Author: Prabhat Kumar
Publication: The Economic Times
Date: October 2, 2001
While world economy is facing the
slowest ever growth prospect in over two decades, China has acquired a
magnetic attraction for investors for the size of its domestic market for
all types of goods, from cars to modem telecommunication products and computers.
There seems to be a race among the Taiwanese, Japanese and western manufacturers
to set up factories in China to take advantage of low-cost manufacturing.
China offers a number of advantages to global competitors to meet the emerging
market challenges. A-grade infrastructure in the Special Economic Zones
and other industrial areas, a host of tax concessions, cheap labour and
easily available skilled manpower at 10-30 times lower cost are all working
to tilt the balance in China's favour.
But the big question is how sustainable
are the Chinese competitive advantages in the long run? First of all, Chinese
statistics are exaggerated. No sooner the year 2000 dosed, China declared
GDP growth at 8 per cent, whereas independent analysts observe that the
actual could have been 6-6.5 per cent. Chinese economy this year is supposed
to have been performing robustly. But a major pump priming by the government
will add substantially to the expected 7.5-8 per cent GDP growth. This
may, however, create fiscal problems, if the pump runs longer. Just released
official data suggests that the export growth in first seven months of
2001 has slowed down to 8.4 per cent from 27.8 per cent last year. Exports
are important, as they constitute a quarter of the Chinese GDP. China's
entry in WTO may further impact the export competitiveness, as many of
the tax incentives for export goods become illegal.
China is yet to adopt rules and
regulations of a free-market economy. Local companies like Huawei Legend
and Haier have received favourable treatments at the cost of foreign companies
who entered the Chinese market with inflated hopes. Many Chinese state
enterprises (SEs) have been lying closed or are on verge of closure for
lack of orders. These companies, supported by bank funds are ready to manufacture
at a loss, just to survive and keep workers on the rolls. Bad loans from
the banks are mounting and size of non-performing assets (NPAs) is estimated
to be $200-300 billion.
Labour regulations are lax and workers
in many industries have to toil for longer hours. Working conditions are
also tough, as workers stay in crammed dormitories inside the industrial
zones, to work from 8 AM to 8 PM. They are not allowed to form their own
associations at the national or regional level. This advantage, however,
may not last long as workers become conscious of their rights. Even though
labour issues are not raised at the WTO, such abusive practices could come
under attack.
Then there are accounting juggleries.
China is new to the western style accounting practices and there is a huge
shortage of trained accountants. There is stiff competition amongst the
SEs to capture market share leading to gross undercutting in costs to sell
in the international market. Corporate governance too is a high casualty,
as transactions are not transparent and managers of SEs indulge in various
irregularities by siphoning off funds offshore, which in many cases comes
back disguised as FDI. Chinese capital markets are underdeveloped. Their
regulations are not in tune with those in free-market economies. Foreign
investors can invest in B -group shares only at Shanghai and Shenzhen exchanges
and cannot indulge in trading in A-group shares meant for locals. Market
has thus been regimented to provide artificial boost to the bourses. Bull-run
in B-shares, which rose by 200 per cent in past one year is coming to dose.
Stocks remain volatile and subject to insider trading.
Political risk in China can't be
ignored. China's entry in WTO will call for large scale restructuring in
their domestic market regulations and practices, which currently do not
allow free operations throughout China. An acceptable level of legal infrastructure
will be necessary to adjudicate disputes to inculcate a sense of confidence
and legal predictability.
Hence summary judgement on permanent
competitive advantages will have to be held back, till China demonstrates
real determination and will power to establish a free-market economy in
a free society.
(Author is additional commissioner
of customs and excise. These are his personal views.)
