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Grip on assembly work share must be tightened
2005-12-28
China Daily
The revaluation of the renminbi on July 21 triggered extensive discussions among domestic economists, as well as their overseas counterparts. But some misunderstandings about the economic basis of the yuan still exist.
The view that the Chinese economy relies too heavily on exports for growth is very common. Economists that subscribe to this theory therefore prescribe a boost in domestic consumption demand to power future economic growth.
The high ratio of Chinese exports to GDP, which stands at 36 per cent, is often cited to support their argument.
At first glance, the ratio does seem much higher than that in other leading economies. But this is a kind of "statistical false appearance" to a large extent.
True, China enjoys colossal exports, which reached a record high of US$590 billion last year. But 50 per cent of this fabulous export value is actually accounted for by half-finished products imported from other countries for processing or assembly.
China's export-to-GDP ratio would drop to 18 per cent if the value of imported parts and half-finished products was deducted from the total. This figure is lower than that of countries with a similar economic standing.
The traditional way of calculating trade volumes is based on the total value instead of added value. This repeated calculation exists in other countries. But the degree varies from one to another based on what sort of link the nation acts as in the global production chain.
The United States, Japan and the European Union perch on the top of the production pyramid, engaging largely in the design, manufacturing and exporting of key parts such as Intel chips and Rolls Royce engines which all have very high added values. These parts account for the largest segment of the global finished products total value.
In contrast, China is towards the bottom of the pyramid, mostly assembling imported parts and completing goods for export.
As a result, the added value created by the Chinese link is insignificant compared to the value of finished products exported from China.
Multinational strategies have created international supply and production chains. The products that used to be made by different workshops in the same factory in a particular country are now completed by different subsidiaries scattered over the globe, or by overseas plants that receive outsourcing orders.
The multinational firms are naturally trying to make the best use of local resources human and material and the advantages of every country.
This approach has had a profound influence on world trade. A country is now able to engage in specialized production in the sector in which it did not previously enjoy advantages, in addition to engaging in specialized production in sectors where it has traditional advantages. This has helped raise productivity and local income in many countries.
This kind of highly specialized production mode also means sharp drops in production costs, which, in turn, help bring about lower inflation.
In the meantime, work division over the world eases the flow of half-finished and intermediate products among different countries.
It is estimated that parts and other intermediate products account for 60 per cent of the total trade volume of Asia. The figure is as high as 70 per cent in the IT and electronics industry.
Over the last decade or so, China has become an ideal location for assembly and the processing of unfinished products - the labour-intensive link in the increasingly globalized production chain.
By the end of 2004, multinationals and overseas investors, for example, had set up more than 500,000 plants in China, the majority of which are engaged in assembling and processing activities for export purposes.
The total output value of processed goods exported from China has risen sharply over the last 10 years. Last year, the figure stood at US$350 billion, or 60 per cent of the country's total export value.
But the value of imported parts, which were assembled in Chinese factories to become completed products before being exported, made up 80 per cent of the total value of the completed products.
Assembling and processing activities help play up the legend of China's exports. Growth is chiefly powered by the export of electronic products and machinery, whose proportion of the country's total export volume has doubled over the past four years.
But behind all this impressive growth, overseas investors and intermediate-product suppliers from Singapore, the ROK and China's Taiwan have been playing a vitally important role. Official statistics indicate more than 70 per cent of IT products and machinery exported from the Chinese mainland are from overseas-invested factories.
Some hold that this sort of production activity only churns out goods of low added value, and that it should therefore be discouraged. They also urge the government to encourage the export of high-tech and high added-value goods.
But their opinions are unfounded. China's most prominent advantage over other countries is the extensive workforce. China should continue to engage in labour-intensive production and the trade of labour-intensive goods.
Chinese-made textiles and shoes enjoy a large share of the world market, which helps power the country's economic growth and increase its foreign exchange reserves. It is advisable for labour-intensive production in all sectors to be promoted.
This is of vital importance to the transfer of millions of rural labourers from the farmland to industry and service sectors, which, in turn, is the only way to create employment opportunities for such a large labour force.
Export-led sectors and enterprises that are also labour-intensive will, of course, play a key role in this respect.
China must continue to try to expand its share of labour-intensive production in the world economy.
The author is a columnist at the Economic Observer.
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