CCG President Leads Discussion about the Future of China’s Export Economy at 2015 Boao Forum

The Boao Forum For Asia (BFA), one of the most prestigious forums for government leaders, prominent business people, and top-flight academic and non-academic scholars and experts from Asia and other continents to exchange their views on the most pressing issues in the Asia-Pacific region and the world, held its 2015 annual conference on March 26-29th in Boao, Hainan province. Committed to promoting regional economic development and integration, this year’s Forum consisted of over 70 symposiums and events focusing on a wide range of key issues pertaining to macro-economic management, regional cooperation, industrial restructuring and transformation, technological innovation, political security, and social welfare.

This year’s Forum invited Dr. Wang Huiyao, the founder and president of the Center for China & Globalization, to moderate a symposium titled “Where to Export” on March 28th, which analyzed the changing and more difficult business environment faced by Chinese exporters. The symposium provided an in-depth examination of the multiple issues related to different policy responses to this shifting context. These included accelerating the transformation of export industries, exploring new overseas markets, and boosting exports through the “One Belt, One Road” initiatives. Nine prominent scholars and business leaders as well as senior government officials were invited to the symposium as panelists.  They included:

– CHEN Feng, Chairman, Hainan Airline Group.

– DONG Mingzhu, Chairperson, Gree Electric Appliances.

– HAI Wen, Vice President, Peking University.

– HUANG Yiping, Professor of Economics, National School of Development, Peking University.

– JIANG Xipei, Chairman, Far East Holdings.

– MAO Jihong, Founder, EXCEPTON de MIXMIND.

– YU Guangzhou, Minister, the General Administration of Customs.

The panelists agreed that China has begun to lose its competitiveness in export trade because of rising labor costs, the appreciating RMB, and the sluggish global economic recovery. In particular, labor-intensive export-oriented industries are facing mounting challenges. To respond to these problems, the symposium advised China’s exporters to accelerate the introduction of advanced technology and industry transformation to move up the value chain and regain export competitiveness. At the same time, they argued that the government should provide more guidance and incentives aimed at increasing exports and improving efficiency. Of all the measures that have been proposed in this area, the establishment of new Free Trade Zones (FTZs) is gaining the strongest momentum and will create a strong impetus for China to regain its earlier edge in the global marketplace.

The following is the highlights of each panelist’s point of view:

Wang Huiyao: leverage overseas Chinese talent to promote enterprises going abroad.

Export-oriented industries have played an increasingly important role in China’s economic development in the past 30 years. Since China joined WTO 14 years ago, its trade volume has risen 8-fold, totaling RMB 4 trillionlast year. But rising labor costs, a continually appreciating RMB, and sluggish domestic demand and an anemic international economic recovery have created growing pressure on the exporters, especially now that China has entered into the “New Normal” of slower economic growth.  Wang noted that to ensure that Chinese goods remain competitive on the world market, the central government has attached higher importance to the plight of export businesses, putting in place initiatives like the “One Belt and One Road” and FTZ construction. While this has been going on, Chinese enterprises have been learning how to tackle the more complex trade environment and exploring new ways for generating fresh growth, including going global through overseas investment and using e-commerce as a sales channel.

According to CCG’s research on the globalization of Chinese enterprises, the new round of Chinese companies going abroad presents tremendous opportunities to privately-owned companies, which already account for over 40% of China’s total outbound investment. One of the remaining challenges confronting firms seeking to go global is the shortage of suitable talent.  However, overseas Chinese professionals and talent can be a vital force to fill this gap.

Dong Mingzhu: industry transformation matters more than business migration.

Dong argued that for Chinese exporters determined to regain their competitive edge, industry transformation is more important than shifting business operations to lower-cost markets. Outsourcing does not solve the problem of diminished competitiveness. If Chinese domestically-based firms begin moving en masse to foreign locations, he added, then local economic growth in Mainland China would suffer.  Moreover, one of Gree’s core values is to bring about changes that improve the quality of life. Dong emphasized that moving businesses to places where labor and other operating costs are lower than in China is at odds with this value.

Moreover, simply moving to a lower-cost location does not by itself guarantee high profits. High profitability stems from offering good products and using advanced technology to make them. Dong cited the case of Gree Electric Appliances, which has managed, despite the changing trade environment, to maintain a high level of exports. It has done this while also transforming itself from being a manufacturer of other brands to a company that has developed and produced its own brands. In the Middle East, Gree already has almost half of the local market.

Wang concluded by saying that  business enterprise transformation driven by technological innovation can ensure greater success for Chinese companies on global markets. In 2013, Gree developed PV solar air conditioning and became the global leader in this area to meet the rising demand for environmental-friendly products.

Chen Feng: “One Belt, One Road” integrates transformation and migration.

The “One Belt, One Road” was initiated at a right time to tackle rising surplus capacity in China’s domestic economy. Even as it seeks to boost domestic consumption, China can rely on this initiative to sell more of its products on overseas markets. In this sense, “One Belt, One Road” can be seen as bringing about a kind of business migration. Moreover, China can benefit neighboring countries with its own economic development. Hence, in Feng’s view, “One Belt, One Road” can actually seeks to be expected no only to boost trade, but bring about regional transformation.

Transformation is not only an issue for business enterprises, but also requires strong policy support from the government. One of the key elements in achieving the aims of the “One Belt, One Road” initiatives is the simplification and integration of custom clearance. Doing that requires support from the governments at all levels.

In discussing exporters, Chen argued that China’s service sector is facing as many challenges as its manufacturing sector. For example, Chinese airlines have encountered numerous barriers and vocal opposition when applying for permission to create flight routes between China and the United States. But Chen added that Chinese firms have unique strengths in competing globally. These include an emerging corporate culture that has become a major contributor to modern worldwide business protocol.

Yu Guangzhou: Customs needs to be an enabler for export business.

Yu noted that while economic reforms are being further deepened and extended in the Chinese corporate world, China’s Government needs to change the way it functions to provide better services for businesses. A simplified and more efficient customer clearance procedure can save firms time and lower their costs, leading to higher profits. And China’s Government has recently introduced a series of new policies to reform customsand promote exports.  These measures include:

·Through the”One Belt, One Road” initiatives, China formed partnerships with over 60 countries to increase customs cooperation, including information sharing, recognizing each other’s customs monitoring and recognition, and assisting one another with law enforcement matters. This way, the governments can jointly establish an integrated and connected customer clearance system to make the international trading process more efficient.

·While simplifying customs procedures, China’s customs authorities are also upgrading their technology and equipment to shorten processing times and lower costs. In the meantime, part of customs clearance fee will be paid by the government to reduce the financial burden on companies.

·The General Administration of Customs has launched pilot projects in seven cities for cross-border e-commerce business to explore the best approach for monitoring and managing customs clearance in this burgeoning business sector.

In the past decades, China’s export trade has expanded tremendously in quantity, while also making big improvements qualitatively. The Chinese share of world trade has risen from 5 to 12%, with its total value exceeding RMB 4 trillion. With respect to the structure of Chinese exports, the percentage of electronic products has risen to 56%, while that of processed products down to 30%.

Jiang Xipei: M&A is the best option for most firms trying to go abroad.

For Jiang transformation is a way to improve service and product quality, while globally promoting domestic brands. To achieve that, he argued, businesses need to consider both long-term strategic plans and short-term market development. Surplus capacity in the domestic Chinese economy needs to be addressed and excess resources reallocated for greater efficiency and sustainable growth. Moreover, Jiang argued that it is crucial for firms going global to build mutually beneficial business relations with the companies in the host countries. For most enterprises, the best option to expand globally is through M&As, which spares them the effort needed to acquire land or use rights over it, build their own factories, and purchase equipment when operating overseas.

Huang Yiping: Overcome “Middle-income” trap.

Exports have been a major driving force for China’s economic growth, accounting for 37 to 38% of its GDP before 2007. But as Huang noted, the Chinese economy has now entered the economic “new normal”, in which the expansion of both its export trade and overall growth will slow down. In addition to factors like rising labor costs and an appreciating currency, international politics is also shaping this sea change. As the worl’s second largest economy, China has strong impact on global market. Huang argued that if China continues to export massive quantities of goods, this will squeeze businesses in other countries, creating more friction in China’s foreign relations.

As they lose their earlier advantage with respect to cheap labor and being able to export goods at low prices, China’s exporters can choose to cope with this “new normal” by either restructuring themselves or operating abroad. Huang argued that the best solution, from the perspective of economic theory, would be for them to stay put in China and move up the value chain or create new businesses through upgrading to improve their international competitiveness. Companies should strive to create higher added value and product quality and introduce advanced technology and the latest management methods.

Huang cited how South Korea has steadily moved up the value chain, but added that after it upgraded industrially, only large manufacturing firms were left standing to compete on world markets. However, Taiwan saw a somewhat different outcome in upgrading its industry. This effort created a number of small-and-medium enterprises in design, innovation, and R&D. And Hong Kong moved up the value chain in its service industry. Huang thus concluded, “Though they all took different paths, they have one thing in common, which is that they were able to maintain employment level during industry upgrading; or as we say in economics, they overcame the middle income trap. This is what we need to achieve here in China now”.

Haiwen:  China could once again enjoy 10% annual export growth in the future.

It is natural that China’s foreign trade growth has slowed down, as the white-hot annual growth rate of 20-30% that occurred over the past few decades was unsustainable. Labor costs and an appreciating RMB are all natural consequences of an economy that is moving from emerging to mature status. Nevertheless, Haiwen argued that even though the export market has gradually become saturated, ways still exist for China to increase its exports, such as tax cuts to give incentives and lower costs for exporters. Controlling labor costs is another option, especially with around 40% of rural labor being idle or underemployed. Adding this under-used labor pool could counteract the trend of higher wages.

Looking ahead, Haiwen noted that three major conditions could enable China to once again drive up its exports. The first is transforming and upgrading its manufacturing industry. As international and domestic market competition becomes increasingly fierce, manufacturing companies have to create unique products and brands and innovative platforms for selling them worldwide. Second, the value of the RMB should be gradually stabilized to halt pressure for its further appreciation. And third, more opportunities must be created by trade system reforms and initiatives, such as the “One Belt, One Road.” Haiwen thus concluded that the current export growth slowdown may not be permanent. It may still be possible, provided the conditions outlined above all fall into place, for China to grow its exports at a 10% annual pace in the near future.

Mao Jihong: Acquire and develop technology during industry upgrading.

Mao argued when firms move up the value chain, great care must be taken to ensure that this does not result in hollowing out of entire industries, particularly the garment sector of the textile industry.  Currently, over 50% of clothes in global market are produced in China. However, despite many years of manufacturing and exporting clothing, China has failed to acquire or develop cutting edge core technology for producing these goods. When considering what needs to be transformed or upgraded, Mao urged us to look beyond China’s rising costs and realize that Chinese firms are not competitive technologically with foreign producers.

Mao further noted that In Japan, the production of high-end garments is done more efficiently and at lower cost than is the case in China. Many Chinese garment companies are now outsourcing to Italy for better quality and less expensive material. Although China is a major clothing manufacturer, the R&D, design, and technology of its garment producers still lag far behind those of its more advanced rivals. In the past, Mao argued, China has gotten around this problem by simply becoming stronger in export processing. He concluded by warning that while achieving real industrial upgrading in textiles, China will have ensure that the sector does not become hallowed in the process.