A finite miracle?

Are there signs that China’s economic miracle might be losing steam? Since I am not an economist, I can’t predict that, but I can point out some of the recent news that indicates a weakening of China’s economic mystique.

To start, there’s evidence Japanese companes now see advantages in switching some of their investments in China over to India (and China’s sensitivty toward the Japanese in recent months hasn’t helped matters).

A growing number of Japanese companies are eyeing India as the next crucial investment destination, looking to cut back their reliance on China as much as to tap into the country’s huge market potential.

Concerns about China losing competitiveness when it eventually lets the yuan rise in value and the flare-up of anti-Japan sentiment this year have prompted Japan Inc. to look more closely at India as an alternative.

India’s strengths include its one-billion-plus population, a rapidly emerging rich middle class, well-skilled but still relatively cheap labour and political neutrality with Japan, all of which could offset a shaky infrastructure, analysts say.

China remains by far Japan’s most favoured and heavily invested region in Asia and will likely stay so for some time. Of some 4,100 Japanese companies operating around the world, more than half do business in China, compared with just 150 in India, according to a 2004 survey by business publisher Toyo Keizai.

India isn’t the only threat. A few weeks ago I saw how Taiwanese textile companies believe the golden age of manufacturing in the Pearl River Delta is ending, and that they might be better off setting up shop in Vietnam. [Might require registration.]

Thousands of foreign businesspeople, primarily Taiwanese, helped turn this southern Chinese city into one of the world’s busiest export manufacturing centers.

Now, amid rising wage and pension costs, energy shortages, tighter government regulation, traffic bottlenecks and other concerns, some of them are starting to look elsewhere. Their restlessness reflects a dark side to China’s economic boom, as growth pains and other issues prompt companies to reconsider starting up or expanding in China.

Chang Han Wen is having second thoughts. He came here from Taiwan in early 1991 when the area was still largely farmland, launching a shoe assembly line with 200 workers. He has since opened five factories, including three shoe plants that employ 3,000 people and produce 1.5 million pairs of specialty boots and high-end shoes a year for export to the United States and Europe.

But his sixth plant, a garment operation, sits empty. Chang has indefinitely postponed its opening, anxious about China’s tense trade relations with the West and the threat of more quotas that would limit clothing exports. That’s only part of his worries.

This year Dongguan’s minimum wage jumped more than 27%. Even with the increase, employers are struggling with worker shortages. Government inspectors are making the rounds at factories, enforcing work-hour rules and pension contributions that officials paid little attention to in the past. Electricity is in short supply, as is fuel.

All in all, Chang says, things have gotten so much tougher that his next investment may be in Vietnam, where many Taiwanese have gone.

“For manufacturers here, the golden period has passed,” he said.

I also believe that many American companies are finding the hassles of doing business in China simply not worth it. That doesn’t mean there’s not a huge line of companies gathered like barbarians at the gate to break into the Chinese markets. But the mantra that the future of all global business lies in China, and that if you don’t make it there you’re essentially out of the running — that seems to be out the window.

Don’t get me wrong. I don’t think things in China are anywhere near a crisis, let alone a collapse. But the seemingly unstoppable juggernaut could be slowing down as investors recognize opportunities elsewhere. We all know it can’t go on forever, and it could be the China Dream is finally losing some of its lustre. Maybe.

The Discussion: 29 Comments

Why anyone would want to do business with the Chinese is beyond me. MOST are simply incapable of being honest. I doubt the Vietnamese are much better though.My friend is a Consulate bigshot.He tells me that MANY U.S. companies are going elsewhere.Tired of gettin’ screwed.The legal system is as corrupt as everything else.You can’t win. If you do win it isn’t worth all of the effort.The Chinese see it all as payback.Ultimately it’s gonna be China’s problem.They just steal all the money and move abroad.Now THATS patriotism!

July 14, 2005 @ 6:44 pm | Comment

I saw a similar argument recently here that there are similarities worth studying between China now, Brazil in the 1970s (the “Brazilian Miracle”) and other controlled economies experiencing booms: basically a rerun of the “no long-term prosperity without freedom” argument, but with some convincing examples.

July 14, 2005 @ 6:53 pm | Comment

This year Dongguan’s minimum wage jumped more than 27%. … Government inspectors are making the rounds at factories, enforcing work-hour rules and pension contributions that officials paid little attention to in the past.

If the above are some of the reasons for companies looking elsewhere with their investments, then I must say this is a very positive development for China.

July 14, 2005 @ 7:09 pm | Comment

Hui Mao, I tend to agree. I don’t see it as a crisis. It just means it’s not the be-all and end-all anymore. And that may be a good thing as you say.

July 14, 2005 @ 7:17 pm | Comment

yeah, doing business here can be a pain in the ass. everytime i read something about the “china miracle,” i always get a little perplexed. maybe it’s alright if you wanna make toys or coke bottles, but otherwise… oh man.
i am certainly not an economist, far from it, but we all know that China’s economic growth is not so unique, we’ve got Japan, Taiwan, Hong Kong, Singapore, all these places have seen major growth for long spans of time. but for all, this stellar growth needs to slow down and come to an end sometime. i personally think that social and political problems, as well as widespread lying and a “screw you” attitude are going to make sustained development difficult.

July 14, 2005 @ 8:01 pm | Comment

Yeah, My dad always talks about the “Chinese Century” etc…WTF are the foreign press talkin’ bout?

July 14, 2005 @ 8:30 pm | Comment

There is no reason why economic development cannot continue as long as human beings are living. You do not need to be an economist to talk about economics, just as you do not need to be a political scientist to talk about politics, but you do need to know something about the subject.

The reference that the textile manufacturers are thinking of moving out of the Pearl River region is not an indication of economic problems. Back in the 1950s and 1960s the American textile manufacturers moved lock, stock, and barrel from New England to the South. There were pretty significant programs established to keep the textile firms in New England, with one exception, they failed. In the end New England did not suffer from it. This is plain economics of the simplist kind.

For your information, for the last two or three years the preferred place of establishing businesses for Taiwanese companies in China is the Bohai area. I have a few freinds that are in the real estate business, and they look at where the Taiwanese tend to congregate, because they think that the land values will rise, first from the Taiwanese and then from other foreigners coming into the area.

July 14, 2005 @ 9:32 pm | Comment

It’s so hard to tell what is going on in China. The left focuses on the gap between rich and poor, and maybe the environment, the right look at property rights and governmet control. (And both are right.) So when I see the minimum wage jump, does it tell me that the evil companies were exploiting the workers or that the government is meddling in the economy? (and since the guy still can’t find workers I’d guess it is the latter) A lot of times I read stories that are negative on China, but they are written by the same journalists who don’t understand economics in America and write about peak oil, or manufacturing jobs leaving the U.S.

Every change is a crisis- when the fact is as JFS points out development and change go hand in hand and they will continue forever. When people’s incomes go up, they become more valuable and thus should not spend their time doing low value jobs. Those jobs leave and new ones replace them. The whole reason why the factory is leaving is because it can’t find workers- who are making more money at other jobs. It’s so stupid it’s laughable, but this is our media.

I know that if it were a free economy there would be no worry. However, China’s growth has lagged Japan and Korea’s rise up to this point, as an article in Foreign Policy pointed out. Technically they could grow faster. If the problems are due to perennial power shortages which are due to the planned economy, and other government caused problems like corruption, then it is a problem.

July 14, 2005 @ 11:06 pm | Comment

I should add that since a chunk of China’s growth has been due to loose monetary policy, and they’ve been reigning that in, there is definitely a slowdown coming.

July 14, 2005 @ 11:19 pm | Comment

“The whole reason why the factory is leaving is because it can’t find workers- who are making more money at other jobs. It’s so stupid it’s laughable, but this is our media.”

Or who have gotten jobs in other places in China that are closer to their families. Guangdong and the Changjiang river are not the only places with new facilities.

As for the possible problem, economically there should be none. The only possible problem could be the slow loss of steam of the economy of a country ruled by a party that bases its legitimacy on the strength of the economy.

Of course, the economy won’t crash anytime soon. The economies of Taiwan, and South Korea are still doing great. They are not as strong as they were at full expansion, but economic growth there still outpaces growth in the US and Europe.

There’s no reason why China should not be the same.

July 14, 2005 @ 11:26 pm | Comment

If everyone keeps ripping everyone off………………………………………………….

July 15, 2005 @ 12:15 am | Comment

Matts comments are pretty sound. Minimum wage is a useless policy, though. If the minimum wage is below market rates, then it means nothing, if it is above market rates, then it just keeps somebody unemployed that could be working.

July 15, 2005 @ 2:15 am | Comment

While there are some very good Chinese companies and some very smart Chinese people, India is my choice for business.

China’s only real advantage over india are its low labor costs and a having a government that is more willing to turn its own people into slaves.

on average ….

Indian workers are more efficiant and better trained than Chinese worker.

Indian businesses are less likely to comit copyright breaches.

Indian factory owners are more honest in their dealings with other countries.

Indian has a superior human rights record

Indian factories produce less pollution.

Indian worker have better working conditions

As for Japan, I’m not surprissed. Who want to invest in a country where the government seems happy to allow people to ransack your businesses periodically.

Japnaese don’t feel safe investing in China anymore and too many dense Chinese seem happy to see them pull out.

July 15, 2005 @ 3:51 am | Comment

From Guangzhou, what I’m hearing is what Thomas just said above, one of simplest reasons for the worker shortage in the PRD is that the inner provinces (Hunan, Hubei, Henan etc) are themselves building industrial parks and factories, many locally-owned are moving there where costs are as low as you’ll find in China. The desperate local officials in inner China, ever eager to match their Cantonese counterparts are also offering all sorts of incentives to set up there.

One thing will remain in Guangdong’s favour, it’s near to HK for the HK Chinese and near the airports for the Taiwanese.

July 15, 2005 @ 3:58 am | Comment

Let’s remember one thing regarding Chinese growth. China started from nothing in 1979, zero, zilch, nada. 1% of global trade in 1979 and STILL 1% of global trade in 1992, (now it’s around 4% according to IMF).

Lift economic and social restrictions from a large population politically straight-jacketed for 30 years and invite the wealthy Diaspora and rich nations to invest in “the biggest market in the world” (sic) and you get 7-9% annual growth.

A GDP growth of 1-2% in a mature economy is worth, in real terms, a hell of a lot more than 7-9% in a developing economy. 50+% of current investment is fixed asset investment, i.e. infrastructure projects, says it all.

July 15, 2005 @ 4:09 am | Comment

Despite what some above have said, China today faces a lot of very real and very serious problems:

– Compliance issues for foreign enterprises
– Electricity shortages
– Structural problems
– Market obstacles not seen in mature economies
– Piracy, theft and counterfeiting
– Rises in labour costs
– Re-emergence of health risks
– Possible export restrictions/quotas
– A corrupt, third world legal system
– Rising social unrest
– Joint ventures where you spend all your time battling with your JV partner not your competitors
– low quality and transient staff
– A goverment that can and often does change national laws and regulations at the drop of a hat, sometimes with devastating effects on business

I’m sure that list can be expanded some more but please notice how many of those items weren’t a problem years ago.

India, despite it’s own inherent problems is improving every year under PM Singh–an economist by trade–and Vietnam is still on course to join the WTO in December 2005 and, most likely, become a real ally of America.

July 15, 2005 @ 4:22 am | Comment

Martyn, except in a few restricted categories, most foreign companies can be and usually choose to WOFEs, no JVs. India, at least a few years ago, required many more categories to be JVs, and they do not work any better there than in China. Vietnam actually has higher labor costs than China (at least it was the case in 1999).

July 15, 2005 @ 4:53 am | Comment

To be honest I’m more worried about the environment. I heard that 70% of China’s freshwater is unsuitable for human use! And the problem seems to be getting worse not better.

It’s all very well China developing, but what’s the point if future generations have to live in a polluted wasteland?

July 15, 2005 @ 5:55 am | Comment

Whoa JFS! I’ve never seen so many sweeping statements in one short paragraph.

I’ve negotiated 3 JVs and handled one divorce. My industry still requires a local partner as the restricctions on what a foreign company can do is very tight as is the law on fees etc.

The associted industries apart from my own also require JVs. No, I’m afraid that while, yes, WOFEs are becoming more prevalent, JVs are still a huge part of doing business in China. Even among my friends in Guangzhou, they’re nearly all in JVs and/or have some kind of local partners. Hell, even my mate the lawyer is in a WOFE but needs a local partner as he’s not allowed to go to court (believe it or not).

Also, no one is directly comparing India to China. All I’m saying is that India is slowly but surely moving in the right direction. Recent new laws loosening restrictions and bureaucracy are evidence of this.

Vietnam has higher labour costs than China? Now you’re scaring me. Vietnam is almost an economic backwater, it’s like China was about 20 years ago. Where on earth did you get those figures?

By the way, I actually wrote an article on The Horse’s Mouth 2 weeks ago about this very subject:

“Hi China. Bye China?”


July 15, 2005 @ 6:11 am | Comment


This is the question that a lot of us ask. By the way, a blog called Public Enemy (bloggrolled on Peking Duck) had a couple of excellent articles on water pollution in China recently. If you’re at all interested in reading some very, very grim facts about water pollution here then I can’t recommend those Public Enemy articles highy enough.

Unfortunately, I think that pollution will get a hell of a lot worse before it gets better in China. Bearing in mind just how bad pollution is already, that’s a pretty grim statement.

July 15, 2005 @ 6:15 am | Comment

This is the link for that blog I just mentioned:


Scroll down and you’ll see one called “state of the environment” and you’ll have to click on the most recent archives to see the others.

July 15, 2005 @ 6:18 am | Comment

martyn: Most of the industries that I am working with are all WOFEs, that is where I am coming from. I do not know the situation with your mate, but I have a close friend, an American with a law degree from the USA, but he also a Chinese with a law degree from China and does practice law in China (he is even the Dean of a Law school, in addition to his practice). I was working in Vietnam from 1996 to 1999, and I take that data from my experience there. Labor rates are not a condition of economic development, but is a response to supply and demand and in this case also to forex conditions (since we are talking about foreign companies).

July 15, 2005 @ 7:03 am | Comment

Wow, you worked in Vietnam 96-99? Was Vietnam’s first initial experiment with economic reform still going on then or had it already finished? As you’ve been there before, how do you rate Vietnam’s chances of successful economic reform, assuming they are accepted into the WTO in December?

Re JVs, I think it must very much depends on what industry one talks about. However, you’re right that there are fewer and fewer JVs about and more WOFEs. You ever read the China Dream by Joe Studwell? I’m still yet to meet a foreigner in a JV who is happy with the JV partner and making money! Haha.

Re Labour costs, where’s Stephen Frost (from CSR Asia) when you need him? I’ll see if I can find out some comparative figures but I’m notoriously crap at searching for stuff on the www.

July 15, 2005 @ 7:15 am | Comment

Martyn, yes I’ve read up on it. The Economist wrote a fairly informative a piece a while back. It’s just mind-boggling how short sighted Beijing is.

If someone like Jiang Yanyong writes a letter asking the Politburo to change their opinion on Tiananmen, they push the panic button, raid his house and cart him off to be re-educated. If companies flout federal and local environment laws and pollute the whole nation for decades, they merely fine them – and then don’t punish them when they refuse to pay or change their business practices.

Is it because the geriatrics won’t be alive when the pollution becomes too severe? Are they only obsessed with China becoming STRONG, so it can become the Middle Kingdom again? I’m no economist, but even I know that fast growth is deadly to a nation if it isn’t build on sound foundations. And having a polluted landscape with effectively bankrupt banks is not a good idea!

It just goes to show you that the real crooks in China are in the CCP. They’ll run the country into the ground just to stay in power (because they need fast growth to buy off as many Chinese as possible, as fast as possible).

July 15, 2005 @ 11:53 am | Comment

The “economic juggernaut” factor of China isn’t neccessarily related to the individual prosperity of its people. All China needs is a per capita GDP equivalent to Mexico to nearly match the U.S. economy in total size. Those who are so suddenly so dismissive of Chinese economic prospects are entirely missing the point. Essentially engaging in the opposite extreme end of the China hype phenomenon. In the long term, even saddled with a relatively mediocre developing economy, the size of China will make it a force to be reckoned with.

July 15, 2005 @ 1:25 pm | Comment

I don’t see anyone being dismissive (projection perhaps?). I think the consensus is that the recent rate of explosive growth won’t go on forever, especially as other locations offer greater appeal. I don’t think anyone is even implying that it’s time to be dismissive of China’s growth. Far from it.

July 15, 2005 @ 1:28 pm | Comment

Jing, as usual, you’re seeing what you want to see in the comments regardless of what is actually written. You tell everyone that they are all “missing the point” (I am very jealous that only you always seem able to “see the point”). You then spring up with a highly selective handful of “facts” which just happen to back up your view. Finally, just throw in a bunch of big words which makes you sound intellectual and away you go….

By the way, I’m still trying to work out exactly what “The “economic juggernaut” factor of China isn’t neccessarily related to the individual prosperity of its people” means.

Still, thanks for coming.

July 16, 2005 @ 6:09 am | Comment


I have to agree that I don’t see how what you’re saying is relevant to the discussion.

July 16, 2005 @ 9:53 am | Comment

Re Pollution: I think my vet summed it up best when he told me not to let my dog drink the tap water in Beijing.

Looking at the Chinese economy in the aggregate is misleading to say the best. Simply taking the gross GDP number and dividing it the official population of PRC (ex HK, ex Taiwan) yields a number that provides very little information. Cities/Areas like Shanghai, Beijing, PRD and the YRD contribute much more to the gross GDP than pretty much the rest of the country combimed but a per capita GDP number does not reflect this.

Anyways becasue of the inherent flaws in the way GDP is calculated it is not the best measure of a country’s economic well being or economic might.

July 18, 2005 @ 8:19 pm | Comment

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