US firms can aid China's economic transformation
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In its annual American Business in China White Paper, the American Chamber of Commerce in China remains confident about the strength of China's economy, stressing that firms will have to adapt as China's economic model enters a new phase.
The white paper, published on April 26 to celebrate the 20th anniversary of the Chamber's legal incorporation, emphasizes that due to the global financial crisis and slow recovery, China cannot depend on exports to the extent it had in the past. The report says China's 12th Five-year Plan is a "thoughtful guide to the next five years, based on the economic turning point at which China now finds itself".
The report stresses that there are still enormous business opportunities for American firms in China – including opportunities to increase revenue from existing China operations, increase exports of US products to China, and increase Chinese enterprises' direct investment in US ventures.
"China is entering a phase of transition and restructuring," said AmCham-China President Christian Murk. "It does so from the foundation of an economy that has grown dramatically for over thirty years. I believe China will be the leading trading power and a diverse and accelerating foreign direct investor."
The report notes that although starting from a relatively low base, China is now actively pursuing foreign investment, especially in the natural resources, finance and real estate sectors. These trends reflect China's domestic emphasis on energy, commodities and infrastructure.
Gregory Gillian, vice chairman of AmCham-China, said that AmCham members had "expressed optimism" regarding the Chamber's goal of $3 trillion in combined revenue from American-invested enterprises in China, American exports to China, and Chinese outbound FDI to American firms for the "second thirty-year period" of 2009 to 2039.
American firms continued to express optimism in the Chinese economy. About 85 percent of American firms surveyed reported revenue growth in 2010 and 78 percent said that they were "profitable" or "very profitable", the report says.
"As major investors in China, American companies have an interest in China's continued success," Murk said. "Our members have shown increased optimism about China's economic growth prospects."
Despite overreaching optimism, the white paper states that demographic changes will present a challenge to sustained growth.
"The Chinese population is now aging rapidly due to its one-child policy. As a result, the working age population will begin to decline in absolute numbers in the next few years. We have already seen shortages of unskilled labor, skilled labor, and managerial and professional personnel," the report says.
Simultaneously, urbanization is taking place at the rate of 1 percent of the population annually, with approximately 13 million people per year moving from rural areas to the nearest large towns. This will "…provide strong structural support for increased domestic demand for the next two decades," the white paper says.
AmCham-China predicts population shifts will provide a structural impetus for wages to grow faster than real GDP in the medium term. However, the household registration (Hukou) system and inequity of social welfare between urban and rural areas will continue limit the flexibility of the labor market.
Furthermore, the white paper stresses that China will need to transform its growth model and develop a knowledge-based economy to maintain its competitiveness in the future, and US businesses can play a role in this development.
"US businesses can serve as a valuable resource by sharing expertise in technology and management," said AmCham-China Chairman Ted Dean.
The paper also urges Chinese authorities to further expand market access and improve regulatory transparency and consistency across different geographic regions, naming three areas for systemic improvement.
First, government procurement reform, as well as standardized contracts and regulations for foreign enterprises will ensure continued growth in foreign investment. Second, a bilateral investment treaty between China and the US will strengthen confidence and provide assurance for both Chinese and foreign investors. Third, reform of the household registration system will improve flexibility of the labor market and support equity of social benefits for workers.
"We remain optimistic about continued opportunities for growth," Gilligan said, adding, "We all made commitments and we need to carry them through."
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