China’s Business and Policy Evolution

March 6, 2008

On Tuesday evening, I had the pleasure of attending a seminar sponsored by McKinsey on China’s Business and Policy Evolution at the Asia Society (http://www.asiasociety.org/) in New York.

The panelists were Howard Chao, Partner and Head of the Asia Practice of O’Melveny & Myers, Nicholas Lardy, a Senior Fellow at the Peterson Institute for International Economics, and Jimmy Hexter and Jonathan Woetzel, Directors at McKinsey & Company who co-authored Operation China: From Strategy to Execution.

I learned a few interesting things:

  • While China is not becoming a democracy in the traditional sense of the word, it is becoming much more open. For instance, they took the rather unprecedented step of posting their new energy policy law proposals online and inviting experts, including foreign experts and McKinsey to review it and suggest changes. The project will probably not be put into law at this NPC but it probably will be at some point in the next 6 months.
  • Urbanization is continuing apace and by 2025 there should be 1 billion urban dwellers. This suggests that 40-50% of the population of many cities and workers at most companies will be migrant workers. As such the government and companies are going to have to be much more supportive of migrant workers than they are today.
  • Despite rising labor costs, most multinationals are not going to move out of China given the complexities of changing their supply chain, the economies of scale that China offers and the lure of the domestic market. Last year Vietnam had $40 billion in exports, China $1 trillion. As such, countries like Vietnam do not have the infrastructure to accept a large scale move of companies from China there. Not to mention a large inflow of capital and companies in Vietnam would probably lead to higher costs there. In other words, while countries like Indonesia and Vietnam are going to grow and offer cheaper labor costs than China, China will remain a major manufacturing hub for most multinationals.
  • Most companies in China were built on cheap labor with little effort made on organizational efficiency which provides great opportunities for productivity improvement going forward as companies bring their global management best practices to China.
  • Interestingly a large portion of China’s exports are coming from foreign companies established in China.
  • Inflation is becoming a problem and might be creating bubbles in real estate and stocks because the negative real rate of return offered on bank deposits is leading individuals to invest in any alternative they can find.
  • China will let the Yuan appreciate against the dollar faster than it has in the past (it appreciated at twice the annual rate of 2007 in the first two months of 2008) to fight inflation and decrease its oil import prices.
  • Economic growth is expected to slowdown to below 10% per year as a result of the global slowdown but will remain high (8-9% per year).
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