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Justin Yifu Lin: The Strategic Thinking of China’s Economic Development and Chinese Enterprises Going to Africa


Background: From June, 4 to June 8, 2014, with the strong support of the National Federation of Industry and Commerce and the National School of Development of Peking University, the first senior management personnel seminar of Chinese enterprises’ “going abroad” (the exploration in Africa) was held in Beijing, jointly organized by the China-Africa Business Council (CABC) and China International Chamber of Commerce for the Private Sector (CICCPS). Our briefing report will be divided into seven issues; this issue will report the speech content of Justin Yifu Lin, Standing Committee member of the CPPCC, Vice Chairman of the National Federation, State Council counselor and professor, and honorary president of the National School of Development of Peking University.

There used to be a lot of Chinese enterprises going to Africa, and the purposes of them can be divided into three: first, to obtain the natural resources because China is short of resources compared with those in Africa; second, to do the engineering construction, for the infrastructure in Africa is in very short supply whereas China is powerful enough in this aspect; third, to explore the market, after all, Africa has one billion people.

With the growth of the Chinese economy, the most important sector of Chinese enterprises to be explored in Africa would likely be the labor-intensive industry. Compared with Southeast Asian countries, central and south Americas and other countries, Africa is the single best option for the transfer of labor-intensive industries, and most likely the last one.

How does this view come about? We must analyze it on the basis of the general trend of China’s economic development.

1. The general trend of China’s economic development

Before the reform and ‘opening up’, China was one of the poorest countries in the world. In 1978, China’s per capita GDP was only $155, less than a third of that in African countries.

  Since 1979, China has maintained its average rise in per capita GDP at 9.8% every year, for 35 years in a row. This is an unprecedented miracle in human economy history, far exceeding people’s expectations then. Today, China’s per capita GDP has reached $6800, about five times that of African countries, becoming a moderately prosperous country. In 2010, China’s economic aggregate surpassed that of Japan, becoming the second largest economy in the world; in 2011, China’s gross volume of export outnumbered that of Germany, making it the largest exporter in the world; in 2013, China’s total foreign trade (imports + exports) surpassed that of America, which made China the world’s largest trading nation. The latest estimate made by the World Bank according to purchasing power parity (PPP) showed that China’s economic aggregate would most likely exceed that of America, making it the largest economic nation in the world. In accordance with the poverty line of $ 1.25 a day, 680 million people in China have been lifted from poverty since 1978. Removing China’s contribution, the number of the poor in the world is not declining, but on the rise.

China’s reform and opening up has not only made a tremendous contribution to the Chinese people’s welfare, but also has driven the world’s development. The financial and economic crisis broke out in East Asia in 1998, which caused many people to believe that the economy of East Asia may be unable to recover, or need a decade or more to recover. Since China did not allow the depreciation of RMB, China’s economy maintained a strong growth trend, resulting in economic recovery in just two years after the outbreak of the crisis. In 2008, the most serious world financial since the Great Depression is another case in point. Following stimulus measures, China’s economy bottomed out in the first quarter of 2009, boosting the economic recovery in other countries.

In 2012, the future development goal proposed in the Eighteenth National Party Congress was to double GDP and the per capita income of urban and rural residents in 2020 on the basis of 2010. To achieve this goal, annual economic growth amounting to 6.8% would be enough, three percentage points less than the previous 9.8%. Given the population growth, doubling the per capita income only needs the average economic growth to reach to 7.3% per annum.

2. External factors cause the slowdown in economic growth

Recently we have heard a lot of argument about “The Collapse of China Theory”. The main reason for this is that China’s economic growth has continued to decline for 17 quarters since the beginning of the first quarter in 2010. Some domestic and overseas scholars hold the view that China’s continuing decline in economic growth is caused by internal factors of institutional mechanisms. Admittedly, China, as a developing country, inevitably has institutional backwardness and as a country in transition, some distorting in the system certainly exists. This we do not deny.

However, the decline of the economic growth rate since 2010 was mainly caused by external factors. Among the BRIC countries which had a good performance in the past, India and Brazil’s decline in economic growth rate was greater than China’s. According to the latest IMF World Economic Outlook data, India’s economic growth was 10.3% in 2010, 6.6% in 2011, 4.7% in 2012, 4.4 in 2013, while in Brazil, 7.5% in 2012, 2.7% in 2011, 1.0% in 2012, 2.3% in 2013. By contrast, the economic growth in China was 10.4% in 2010, 9.3% in 2011, 7.8% in 2012 and 7.7% in 2013, the situation being much better. Some high-income Asian economies also experienced a more substantial slowdown in economic growth than China, for example, the economic growth in South Korea was 3.7% in 2011, 2.0% in 2012, 2.8% in 2013. The figures mentioned above indicate that we cannot use internal factors to explain the decline in China’s economic growth, because other middle-income countries and high-income countries saw a similar or greater decline after 2010.

In order to figure out the factors which led to the decline of economic growth in a number of economies, we need to use the analytical framework of the “troika”: exports, investment, and consumption. In terms of exports, China’s largest export market is the Eurozone, but since the world financial crisis in 2008, the economy in the Eurozone has not fully recovered, resulting in the negative growth in 2012 and 2013. China’s second largest export market is the United States, whose economic growth rate in 2012 and 2013 was 2.0% and 1.8% respectively, both of which  were far lower than the average level in history. As the world’s third largest economy, Japan has stagnated in economic recession for more than 20 years. As a result, China’s foreign trade growth is very sluggish. India, Brazil and South Korea also encountered the same situation due to the the export side of the “troika” which did not keep up the pace. When it comes to investment, all countries have adopted proactive fiscal policies to increase investment, combatting the world financial crisis in 2008. Four or five years later, these projects have been completed or near completion. At this point, if no new projects were invested, the investment growth rate would inevitably drop. In this case, the investment side of the “troika” would fall behind as well. In regard to consumption, China’s domestic consumption still maintains a relatively high growth rate; the rate of other countries is slower. In summary, the decline in China’s economic growth is indeed caused by the international external factors.

If developed countries want to achieve a real economic recovery, the structural reforms aimed at improving the economic competitiveness must be adopted, but they may result in the rise of unemployment rate in the short term. Taking this into consideration, we may find it hard to carry out the structural reforms. Developed countries are most likely to experience a decade or two decades of economic recession just like Japan.

3. Expanding domestic demand helps achieve development goals

Under the above-mentioned international economic situation, China’s economy should clearly shift to domestic demand, namely, domestic consumption and investment, rather than keep relying on exports to drive. The question of whether to rely more on consumption or investment has generated a large amount of debate in China.

We believe that stimulating the economy should depend on investment. Consumption is the goal of economic growth under the condition that the income levels be improved. The improvement of the labor productivity is the prerequisite for the improvement of income level. How to enhance the labor productivity level? For one thing, we should rely on technological innovation, industrial upgrading, so that each worker could produce more products, or put higher added value on these products; for another, we should continuously improve infrastructure, make market transactions proceed smoothly and reduce transaction costs. Technological innovation, industrial upgrading and the improvement of infrastructure all require investment and only by relying on investment can the sustainable growth be achieved. Expanding consumption without improving the labor productivity level can only lead to a short time of savings maintenance until they are run out. The crisis occurs when we have to repay the resultant excessive debt.

Effective investment is the prerequisite for stimulating the economy by investment. So-called effective investment refers to investment that has a relatively high economic return and a relatively high social return; this kind of investment can really improve the labor productivity level. The question is not whether we should invest, but do we have good investment opportunities. After over thirty years of economic growth driven by investment, do we still have good investment opportunities? The answer is definitely.

China, as a middle-income country, firstly has plenty of space for industrial upgrading. The industries and technologies in developed countries have already been at the forefront in the world, and it would be hard to know what to invest next. However, in China, the industrial upgrading and technological innovation within the world industrial chain and the technological chain would be easier, thus obtaining high rate of return on investment. Secondly, much remains to be done on the infrastructure in China. We have put much investment on infrastructure in the past but most of them are between cities, while the infrastructure within cities such as the rail transportation, ground railways and all kinds of pipe networks are in extremely scarce. Thirdly, China has severe environmental pollution problems, which also requires investment to address. Last but not least, the urbanization rate is not high enough in China - currently only 53% - far lower than the level of 70% to 80% in developed countries. Many good investment opportunities constitute the biggest difference between China, as a developing country, and developed countries.

China not only has large space for investment, but also has a great number of resources to invest in. Firstly, the liabilities level of the Chinese government is lower than that of general developing countries of developed countries, which makes it possible to expand investment through active fiscal policies. Secondly, private savings have made up 50% of GDP, which is the highest level worldwide. Lastly, China has the largest foreign exchange reserves in the world, with 3.9 trillion, sufficient for the import of machinery, equipment and raw materials needed for investment. Other developing countries have as good investment opportunities as China, but their governments are often in high debt, and low in private savings, coupled with the lack of the foreign exchange reserve. So the good investment opportunities would not work. This is why China is different from most developing countries in this respect. If we can take good advantage of these favorable conditions, China’s economy will be able to maintain a long-term rapid growth.

Local government debt will not lead to systemic risks. According to the statistics from the Audit Administration, local government’s direct liabilities has amounted to 10.9 trillion, 7.9 trillion secured debt, altogether 17.9 trillion and the secured debt from the local government would not necessarily be repaid by the local government. Based on past experience, around 15% of them would be repaid by local governments. If so, in the case mentioned above, local governments should repay 1.2 trillion, plus 10.9 trillion it have to repay, and the numbers add up to 12.1 trillion, constituting approximately 21% of GDP, and this proportion is not high. In addition, the debts of Chinese local governments differentiate those from other countries’ local governments, because the debts from other countries generally are foreign debts, used for consumption, whereas debts from Chinese government are typically internal debts, used for investment. After consumption, the money is gone whereas investment is in assets, most of which are good assets.

The main problem for local financing platforms is the short-term debt used for long-term investment. If we borrowed money from the World Band for investment projects like infrastructure, the length of maturity would be as long as 30 or 40 years, but now the length of maturity for many local financing platforms has only 1 or 3 years. So a great number of previous local financing platforms have turned from traditional banks to shadow banks for money, which is still short-term debt. However, the risks borrowing money from shadow banks are greater as the interest rates are higher than those from bank loans. The best solution would be to allow local governments to issue bonds themselves, so they can do the long-term investment through long-term debt financing. However, the law has it that local governments are not allowed to issue bonds and this should be changed. Before the change of the law, the solution would be to let local governments borrow money from banks rather than shadow banks, because in this way the burden due to interests would be lighter and the whole process would be more transparent. Besides, the central government could issue bonds. In the NPC and CPPCC, it was announced that on behalf of local governments, the central government would issue the bond of 400 billion yuan; this scale can still be improved.

To sum up, the proposed goal of 7.5% in economic growth this year can be achieved, and in the next decade or more, maintaining 7% to 8% economic growth is feasible. In accordance with purchasing power parity (PPP), the per capita income of China was 21% that of America in 2008, and this gap equaled that of Japan in 1951, Singapore in 1967, Taiwan in 1975 and South Korea in 1977. These four countries all kept the economic growth of 8% to 9% in 20 years, and China is expected to do this. Adding appreciation of the RMB, the per capita income of China is likely to reach $12,700 in 2020, becoming a high-income country. This will be a milestone for the great rejuvenation of China, and also makes it significant for Chinese enterprises’ exploration in Africa.

4. China’s labor-intensive industries should explore in Africa

As mentioned before, there are three ways for Chinese enterprises to enter Africa: obtaining resources, engineering construction and exploring the markets. All three methods have different prospects.

Firstly, following China’s rapid economic growth, resources would be in great demand, so the market outlook of resources industries in Africa is optimistic. Most resources in Africa have been controlled by the Europe and America, which has formed since the colonial era. China, as a latecomer, can only resort to economic means to get into African markets, and mining prices would certainly rise as the demand increases. The past twenty years was a prime time for Africa’s development, largely because of China’s demand for natural resources causing rising prices, which brought development opportunities for African countries. However, under the circumstances of low transparency and immature system, money earned by selling resources went to the government would be likely to result in breeding corruption. The number of people get benefit in this way is limited, and the mode of trading resources for money would face a lot of criticism.

Secondly, infrastructure in Africa is poor, and engineering construction is in tremendous demand. As the Chinese saying goes that building the road is the first step to getting rich – this is also true for Africa. Enterprises that do infrastructure projects are very scarce in Africa. This, coupled with Chinese enterprises’ technological and financial advantages, making the prospect promising.

Finally, despite its large population, Africa is a low-income place, making the market opportunities not as big as what people have imagined. Africa’s GDP has accounted for only 1.6% of the world. Groups with the power of consumption are mostly distributed in urban cities, making the number limited. People who live very far from urban markets are generally poor and products will not reach them.
In addition to the three methods aforementioned, the method of transferring labor-intensive industries to Africa is worth promoting. The salaries for blue-collar workers in China are generally $400 to $500, and industries are unlikely to recruit workers sometimes. China will become a high-income country by 2020.At that time, the salaries of workers will be at least between $1000 and $1500, which would make many labor-intensive industries hard to survive. To address this challenge, industries have the following three strategies to choose: to the both ends of “smile curve”, focus on research and design brands; to turn to more intensive intermediate products with a relatively high value-added capital, or machinery equipment or other industrial products; to develop in the low-income level areas. Of all the three options, the third one is the key because without the processing to support the whole process, bands design and research would be out of the question, and it would be difficult to shift to capital-intensive intermediate products and machinery equipment.

When it comes to the development in low-income areas, central and western China would firstly cross people’s minds. In fact, the space here is limited for two reasons: first, a large number of labor forces have already shifted to the eastern China; second, transport infrastructure has been improved, substantially narrowing the gap among salaries in different places. At present, the salary gap among the central, the west and the east is only around 30%. As with the increase of salaries in the eastern coastal regions, the salaries in the central and western China have also risen. As a result, little space exists for labor-intensive industries transferred to the central and western China.

It is an inevitable choice to transfer labor-intensive industries overseas gradually. From the industrial revolution, textile and shoe-making industries first appeared in the United Kingdom, and with the development of the UK economy, these industries began to transfer to the United States and Europe, to Japan after the World War II, to the Asian Tigers in the 1960s and to China in the 1980s. China has now reached the development level of Japan in the 1960s and East Asian Tigers in the 1980s, so as a consequence it is essential for us to transfer labor-intensive processing sectors overseas. To leave them at home would result in their demise.

There are multiple options in terms of overseas destinations for the transferring, such as Southeast Asia not far away from us. Many overseas Chinese live there with no language barriers. However, we face two problems. One is that Southeast Asia has a small population, with only 90 million in Vietnam, 15 million in Cambodia, and 6 million in Laos. The shift of labor-intensive industries to Southwest Asia would cause the rising salaries, the rising rate of which would be greater than that of China. For example, the salary level in Vietnam was about 1/4 of that in China in 2009, and now is 1/2 or even 2/3 of China’s. As can be seen from the statistics, South East Asia does not have the capability to undertake the transfer of labor-intensive industries. Moreover, coupled with the issue of South China Sea and America’s stirring up trouble behind, the anti-Chinese sentiments and the intensification of ethnic conflicts would occur from time to time.

Africa is the single best option for the transfer of China’s labor-intensive industries, and most likely the last one in the world. Africa has a population of 1 billion, just like the situation in the beginning of China’s reform and opening up; 80% of them are surplus labor forces in rural areas, and the salary level in many African countries is 1/10 of that in China. In the two decades after China’s reform and opening up, the salary level of processing and manufacturing industries did not rise, giving us a lot of space for growth. Currently Africa is the only place in the world that can undertake the transfer of Chinese manufacturing industries and guarantee salaries’ leveling off in 10 to 15 years. Africa’s salary level remains the lowest across the world. Since the products of labor-intensive industries are always in demand, they would be kept producing in Africa instead of transferring to other places.

Africa’s current infrastructure conditions, enterprises’ business environment and government efficiency are not good enough, far below the level in China now, but they are better than those of China in the beginning of the 1980s. In 1984, I went to Shenzhen from Guangdong for the first time. It took me more than 10 hours to drive 300 kilometers, and I took the ferry three times, for there was no bridge.

If African countries can learn from China's experiences, they can also achieve economic growth. The primary secret for China’s economic development is that the secretaries of local governments, the governors and the mayors attract business and investment in person, solving problems for these enterprises. Poor infrastructure can be improved by setting up an industrial park; poor government efficiency can be enhanced by implementing one-stop services in the industrial park. During the process of attracting business and investment, the secretaries, governors and mayors would leave their phone numbers, and you could contact them when meeting any difficulties. This also went for customs. These enterprises could be granted the green channels and the priority to get through clearance. China’s approach is to give special treatment to industries with the priority to develop under the circumstances that infrastructure conditions, enterprises’ business environment are not good enough. According to the business environment indicators of the World Bank, China today still ranks more than 90th in the world, but the environment of industries which are given priority to develop is good, and there will be more and more resources for the later improvement.

The transfer of China’s labor-intensive processing industries to Africa is a win-win choice. For Africa, they can create a great many employment opportunities and exports through the development of labor-intensive industries, and thus shake off poverty. As for China, these labor-intensive industries with employment opportunities for 100 million would create a big problem if they could not find a channel back home. What’s more, while the processing sectors are transferred abroad, the headquarters can still stay in China. The people who work in the headquarters are all the white-collar workers with high salaries, and the key intermediate products and machinery equipment transported abroad create space for domestic industries’ upgrade. Coupled with the development of other high value-added industries, the annual growth of 7.3% would able be maintained, which set a new milestone for the great rejuvenation of China. In addition, in the next few years, with the change of the world economic pattern, the political pattern would change as well with contradictions and conflicts arising. Africa has 54 countries, which means it has 54 votes in the United Nations. If China not only gives them the opportunities to develop, but also the ways, these countries will certainly support us, which is favorable to our diplomatic environment.

5. The case of HuaJian company: achievements and challenges

In March 2010, I met with the prime minister of Ethiopia at that time and introduced our research results to them. In the past, they had not attracted suitable investment, because they required labor intensive industries, not the most advanced technology. The prime minister understood me as soon as I had explained. Thus, in August 2011, when they attended the university sports games held in Shenzhen, their embassy arranged shoe-making industries to take charge of attracting investment. Mr. Zhang, the general manager of HuaJian Company visited their capital in October that year and decided to invest on the spot, employing 80 workers who were sent to China for training. In January 2012, the branch company of HuaJian in Ethiopia was put into operation. Its staff reached 1800 by the end of 2012, and was up to 3500 by the end of last year, it became the largest import industry in Ethiopia.

The story changed the world’s view towards Africa. Before HuaJian, nobody believed that Africa could be turned into bases of modernized manufacturing industries and sell products to the western market. HuaJian’s story not only proved that it was feasible but also profitable and the p for profit was enormous. For example, workers’ salaries at HuaJian accounted for 22% of sales price in China, but in Ethiopia it is only one tenth of this. The productivity level of Ethiopia workers amounted to 70% of China's after a year, and their salary costs decreased from 22% to 3%, which brought about 19% of the profits. Of course, the logistics cost in Ethiopia is higher. In China it only accounts for 2% of the sales price, while in Ethiopia it rose to 8%, but there is still 13% of profit to increase. With the growing production scale, logistics costs will go down, resulting in profits going up.

Employing workers in Ethiopia was very easy compared with the difficulty of hiring new staff in China. If HuaJian in Ethiopia is to recruit 100 workers, they only need to post a small paper slip, and there would be two or three thousand people coming the next day, a bit like China’s situation in the early 1980s. At that time it was hard for young rural labors to enter the factory, and a lot of people worked in factories through nepotism.

China now needs to send management personnel to Africa, and train local management later. HuaJian’s branch company in Ethiopia recruited more than 80 workers to China for training for three months, after the training six of them chose to stay in China, and a year later they went back to Ethiopia and became managers with fluent Chinese, earning a salary of over 2,000 yuan. This was the average amount for workers in China, but it was considered high in Ethiopia. If the company trained more of such people, the cost would fall, and profits could still rise.

One of the reasons why buyers did not place orders in Africa is that the quality of products could not be guaranteed, and most importantly, the time of the delivery could not be ensured either. We are all aware of the fact that there is a striking contrast before and after Christmas for prices of shoes and clothes, etc. If you cannot deliver products on time, then buyers have to bear a huge loss. The example of HuaJian proves that in Africa, as long as there are excellent enterprises that know how to manage, producing products of reliable quality and the delivery time being expected, coupled with the benefit of zero tariffs, a large number of order forms from buyers would go to Africa, and the expansion of enterprises would be very fast.

The future challenges on the one hand are the shortage of the talent pool, and people in China are worried about going to Africa as it unfamiliar impression to them. However, other countries have continued to explore in Africa to set up labor-intensive industries. They have taken advantage of the local cheap labor force, competing with us for the same international market, so domestic industries should grasp the opportunities as soon as possible. For instance, after the success of HuaJian company, Ethiopian government established a new industrial park last year, and the 22 standard factory buildings were all rent out in less than three months by enterprises in Turkey, South Korea, Bangladesh and other countries, but among them, there was only one Chinese enterprise. So we can see the labor-intensive industries would not survive if stuck in China or lag behind the pace of other countries exploring in Africa.

I hope this seminar will be a good start, so that more owners of labor-intensive industries will seize the investment opportunities in Africa, which is beneficial to their enterprises, our country and human development.