Sustaining China's Growth Path


T-Salon has a post based on a Merrill Lynch report about business opportunities in China, and she is worried since she is not sure "what that means to the thesis of China - the savior of European companies whose domestic market has saturated, and of course the larger topics of the global economy":

many foreign investors say China is the most competitive market in the world, and it is likely to get tougher. Domestic brands are proving aggressive and savvy...where foreign companies have traditionally dominated. Even when there is profitability, margins are eroding in many sectors. And while foreign companies have seen strong growth in wealthier coastal cities, maintaining that growth will mean tapping China's poorer hinterland, a more costly enterprise.

My impression is that t-Salon should not worry too much. China is not going to be an easy ride for any external company and this should have been clear from the start. China has global ambitions, and this means it is not going to be a 'soft touch'. Anyone familiar with the Japanese experience would also be aware that there is something akin to an Asian growth model at work. Margins may be dropping in China, but I feel this is not the key point. US, and increasingly the EU, companies are outsourcing to China because they have little realistic alternative given their cost structures and the reality of tight margins in the domestic market. That working in China isn't going to be a pushover doesn't mean it isn't going to be extremely attractive. Then there is the point about the hinterland. This is clearly going to be much more of a challenge than the first stage, coastal, development. The key surely lies in the development of an internal consumer market in China, and this is no foregone conclusion. At the same time as the 'transition' provoked deflation eases, and labour costs start to rise in China, this will present new internal pressures. Nothing is guaranteed. This is path dependent. Banking and other crises may occur, just as they happened in their day in the UK and the US. But there is a learning curve, and the world has little alternative, so my feeling is: this will happen.