Wall Street Journal
KER GIBBS
As markets continue to plunge around the world, much of the selloff has been driven by fears of a slowing Chinese economy. Beijing announced Tuesday that economic growth declined to 6.9% in 2015, a quarter-century low, and investors are, to say the least, skittish. But much of this slowdown in China has been limited to the nation’s heavy industries and manufacturing. The good news is that China is now in the midst of a transition from a low-cost, manufacturing-based economy to one focused on value-added goods and services. Many American businesses remain optimistic about the country’s long-term prospects.
There’s no denying the short-term reality. On Thursday, the American Chamber of Commerce in Shanghai released its member survey of businesses operating in China. Only 61% reported revenue growth for 2015, down from 75% in 2014. The number of companies with declining revenues more than doubled, to 23%. Responses from the manufacturing sector were starkest: Almost one-third of respondents are anticipating 2015 revenues below their 2014 results.
While it would be presumptuous to say that 2015 was the year China began falling from its position as the world’s manufacturer, the country clearly faces new challenges. When asked about the biggest risk to their business in China, 91% of respondents identified increasing costs. That will make it harder for low-end manufacturers to compete with other countries.
China has been trying to prepare for this change. Industrial policies such as “Made in China 2025” aim to cultivate higher-end manufacturing. “Internet Plus” seeks to promote growth through the adoption of home-grown technology across value-added industries. Yet government-sponsored initiatives alone won’t pull the economy up the value chain.If China wants to become a service-based economy, foreign capital and technology will be integral to its success, just as they were in its transformation into a manufacturing economy from an agricultural one. But in order to continue attracting foreign companies, China must do more to change the way it does business.
Some of the government’s recent policy initiatives, for instance, have been discouraging. In identifying the challenges facing foreign firms in China today, more than two-thirds of American companies in our survey pointed to procurement practices that favor local companies. Likewise, the unequal regulatory treatment of foreign and domestic companies.
A similar number were also wary of infringements upon intellectual-property rights. Nearly half of American companies constrain their investment in China because of a lack of intellectual-property protection and enforcement. For a country bent on transforming and energizing its economy through technology, this is counterproductive. So too are industrial policies that skew toward local firms, particularly in information technology.
Among the reforms our members seek most are strengthened legal institutions, a reduction in market-access restrictions, and a streamlining of administrative approvals and taxation. Interestingly, the industries that ranked these as “very important”-banking, finance and insurance, and health care-are the ones that are vital to the development of China’s service sector. They are also the industries in which China’s protectionist urges are the strongest.
Despite these challenges, American companies in China are here to stay. But rather than financing factories and machinery, they are investing in sales, marketing and business development, productivity and automation, and e-commerce. In short, they are investing in the service industries that will help China thrive in the future, and some of these new investments will be going into areas that can help absorb the job losses in manufacturing.
As China’s leadership navigates what may be a difficult few years ahead, it must not lose sight of the principles that underpin the world’s most successful economies. Nor should it be afraid of them. One of those principles is competition. Our members identified the growing strength of domestic competitors as one of their most potent challenges. But this is something American companies celebrate and welcome, especially when it’s on a level playing field.
This also means that Chinese firms are capable of competing with world-class companies at home. These companies will do the same overseas, bringing new products to American consumers much in the same way that American and other foreign firms have brought benefits to China.
This interplay of trade, long the anchor of the U.S.-China relationship, will continue to benefit our economies and improve the lives of the Chinese and American people.