Ties That Bind - Bay Area Council Economic Institute

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Ties That Bind
goal. Of the balance, some companies produce for a mix of Chinese and global markets, while
only 10% are in China to take advantage of a lower cost structure and sell back to the U.S. For
many of those, the lower cost of having a China operation helps them remain competitive and
sustain jobs in the U.S.
Doing business in China is not without challenges. For many foreign firms operating in China,
regulation (bureaucracy and lack of transparency) has been a problem. Despite its market elements,
the role of government in the economy remains pervasive. Competition among foreign
and domestic firms has intensified, increasing price pressure and eroding margins. Other challenges
include intellectual property rights (IPR) infringement, and growing difficulty in finding
and retaining qualified local managers. In major cities, local pay packages are now approaching
expatriate rates, and in some industries employee poaching is common. As personnel and real
estate costs in coastal areas and major cities such as Beijing and Shanghai rise, more U.S. companies
seek opportunities in second-tier cities in China’s interior. This brings new challenges in logistics
and staffing, and even weaker IPR enforcement than in Beijing or Shanghai, where central
government influence is stronger.
Despite its breakneck growth, China faces economic challenges of its own. Energy shortages
and poor transmission infrastructure produce routine power outages, and a heavy reliance on
coal-fired generating plants has degraded air quality nationwide. Compounding its severe environmental
problems, the nation faces looming issues of water quality and availability, in its
urban areas.
Billions of dollars in savings deposits with major banks are tied up in loans to poorly performing
state-owned companies. Linkage of the yuan to a basket of currencies instead of the dollar in July
2005 has resulted in an expected 4% appreciation by yearend 2006, but the currency is believed
to be undervalued by at least 20%. Many economists argue that the size of China’s economy, its
per capital income and other indicators should be stated on a purchasing power parity (PPP) basis,.
Using PPP as a measure, China’s economy increases from $2.2 trillion to nearly $8.2 trillion,
according to U.S. State Department estimates—larger than that of Japan and second only to the
U.S. Annual per capita income is restated as $6,210.
An estimated 87,000 pubic protests or disturbances occurred across China in 2005, many linked
to corruption or to local and provincial government appropriation of rural land for development.
It has been estimated that China must generate 200 million new jobs over the next 20 years simply
to absorb displaced rural workers and families moving to Chinese cities, and to reduce the
gap between rural and urban wages. This will in turn require a minimum 8% annual GDP
growth, and a new rural development model to improve the lives of some 800 million remaining
rural residents. Cities will not be able to accommodate them and, with only 15% of China’s land
arable, traditional farming will not offer a full answer either.
Finally, security concerns over China’s ongoing military buildup, its weapons exports, and its
uneven enforcement of intellectual property protection inhibit the more advanced technology
transfer that China seeks. While foreign companies are increasingly monitoring the workplace