Is China's Competitive Advantage Under Attack?

We all know that China means lower overheads and over the past few decades China’s low labour costs have acted as a major incentive for foreign manufacturers to shift their production facilities to the world’s most populous country. For years this pool of cheap labour has been such a widely established economic concept that current wage hike trends are causing analysts to reconsider the very foundation of China’s competitive edge.

For foreign manufacturers considering a move to China, low labour costs are often seen as the major motivator for firms to relocate their production facilities. As local wages increase, many are beginning to question what the effect will have on the so-called “China Price Advantage” and are there driving factors behind China’s competitive edge other than an excess of cheap labour?

Whilst manufacturing wages in the export sector in fact increased between 10 and 20 percent in 2006, and prices of many consumer goods exported from the Mainland are rising at 2 percent per year, China’s comparative advantage in manufacturing does not solely stem from the nation’s low labour costs. A study entitled “Deconstructing the China Price” conducted by the Merage School of Business at University of California-Irvine found China’s Price Advantage extends to eight different economic drivers.

Low labour costs were found to be the dominant driver, accounting for 40% of China’s total competitive edge, leaving many to revaluate the other competitive advantages a Chinese strategy has to offer. Other important driving factors, including access to affordable capital, a highly developed and efficient supply chain, a comparatively low cost currency, environmental polices, the benefits of lax intellectual property enforcement, health and safety standards and the galvanizing influence of foreign investment, together contribute the remaining 60 percent of China’s competitive advantage.

Although China’s labour costs are undisputedly rising, a trend predicted to continue in the years to come, they are still only one-fifth, or 18 percent, of the US’s average factory wages. In addition, compared to many other low wage nations, the productivity of the Chinese workforce is considerably higher. The “Deconstructing the China Price” study also states “Chinese manufacturers save 17 cents on the manufacturing dollar for labour costs relative to US competitors”.

Some analysts still believe that steadily increasing labour prices in China will eventually erode the nation’s competitiveness. However, it must be recognized that the low cost of labour is only one component among many, which make up China’s competitive advantage. These additional forces, and the synergies between them, contribute more to the China advantage than first meets the eye. The combination of these eight driving factors, and the roles played between them, will ensure China remains an attractive destination for Foreign Direct Investment (FDI) and retains its competitive edge for many decades to come.

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TRADE

Hong Kong

Hong Kong retains the title of World’s Freest Economy.

Since 1970, Hong Kong has ranked as the world's freest economy and this year it retains the position for economic freedom with a score of 8.9 out of 10, nudging over Singapore, New Zealand and Switzerland. The United States ties for fifth along with Canada and Britain. The report, published by The Fraser Institute in conjunction with the Cato Institute and other think tanks around the world, ranks countries on their adherence to a set of policies that measure the degree of economic freedom.Read more...

Selected goods from Hong Kong receive zero tariff’s entering Shanghai.

During the first five months of 2007, Shanghai’s customs verified that over 697 shipments from Hong Kong enjoyed zero-tariff’s under the Closer Economic Partnership Agreement (CEPA) set up between Hong Kong and the Mainland. This marks an increase of 22.8% over the same period in 2006, with the total value of shipments and tax concessions up by 26.81% and 31.18% to US$43.04 million and RMB33.54 million respectively. A large array of products consisting of pharmaceuticals, garment, coloring agent, polystyrene, aluminum alloy plates and polyurethane being eligible for zero tariff. Read more...

Hong Kong seen as safest channel for entering China

The heads of two overseas Chambers of Commerce are convinced that Hong Kong is the preferred platform and stepping-stone for foreign SME’s to enter the Chinese mainland. The head of Dresden Chamber of commerce and industry, Mr. Schnell commented, “ commented that his SME members are looking for strategic Asian locations that are “safe rather than cheap”. He goes on to comment “Hong is one of the safest places to enter China and Asian markets”. Read more...

Chengdu to be the international air hub of Western China

On the 26th of August 2007, US based 3E Airlines launched direct international Cargo services from Chengdu to the US and Europe. No direct international airfreight service was available from Chengdu prior to the launch of Korean air route Seoul-Chengdu-Delhi-Brussels on 6th March 07. In the past,cargo from the region incurred high logistic costs and significant time constraints from transferring through Beijing, Shanghai, Guangzhou and Hong Kong. The enhanced new routes will provide time and cost efficient air cargo transport from Chengdu to Europe and the US, further upgrading Chengdu’s logistics capabilities and capturing favorable attention from foreign investments. Read more...

Forestry firms to enjoy tax exemptions

Forestry and agricultural products will enjoy reductions and possibly exemptions of income tax and value added tax, in a recent push to nurture the development and sustainability of China’s dwindling forest reserves. Plans for lengthened loans and other financial services tailored for the forestry industry are also being employed to help further the push. Read more...

China to beat Japan in US imports.

China has been the fastest-growing export destination and is now set to overtake Japan’s ranking as the third largest export market for the US. Recent bilateral trade between China and US has reached over $260USD billion, more than 100 times higher than in 1979. This fast-paced trade expansion has brought noteworthy benefits to both countries. For many, these benefits maybe hard to establish, though US’s GDP has grown 0.7% and has pushed prices down by 0.8% as a direct result of the increased trade, thereby increasing the level of disposable income. Read more...

China Cuts Tariffs on 5,375 ASEAN Commodities

In a drive to further enhance bilateral trade within the region, China has cut or scrapped tariffs on 5,375 commodities from the Association of Southeast Asian Nations (ASEAN). With the average tariff being reduced from 9.9% to 5.8%, all products have been said to enjoy zero tariff ratings by 2010 when the free trade guidelines have been clearly established. Read more...

Yuan alone cannot rebalance economy

As China continues to face escalating trade frictions with the US and other trade partners, new methods aimed at boosting domestic consumptions will be introduced to assist with the rebalancing of it’s economy and ensure that the Yuan does not continue to rise at such remarkable levels. Beijing will use a assortment of tools such as; “strengthening domestic demand, further opening the country’s market, increasing imports, encouraging outbound investment and promoting urbanization,” tells a government official. Read more..

Anti-monopoly Law passed in Beijing

Beijing, in a drive to protect National Economic Security, will force foreign investors to apply for approval from the Ministry of Commerce when they set out to purchases domestic companies, which have close ties to economic security. The law also ensures stringent measures to restrict monopolies from using their dominant status in the market to curb competition, fix prices, enforce package sales, and refuse or enforce trade.Read more...

China steps up curbs on process trade.

In an attempt to regulate the management of process trade, the Chinese government has decided to annually update the list of "restrained" products in the process trade sector to establish a transparent regulatory system and address its trade imbalance. With their ongoing efforts to curb the development of the process trade in labour-intensive industries,the policy targets high-polluting and high energy consuming industries in the eastern region.Companies engaged in the sector will be required to lodge guarantee deposits in the Bank of China, while registering process trade contracts with the customs. Read more...

US unhappy with Canadian implementation of Softwood Lumber Agreement:

The United States will initiate arbitration proceedings under the 2006 Softwood Lumber Agreement and is taking extra measures to monitor Canada’s compliance with the SLA. The agreement was designed to settle a longstanding and acrimonious dispute regarding the import of Canadian softwood lumber, but since then has run into troubled waters with multiple concerns having been raised in the US regarding Canada’s compliance with the agreement. Read more...

US firms yield high returns on China investments

Developing sound and stable Sino-U.S. economic and trade relations constitute an important part of the bilateral relationship, as US companies have yielded good returns from their investments in China amounting to approximately US$80 billion in sales revenues for 2006. Thanks to joint efforts by both sides, China-U.S. economic and trade relations have maintained a momentum of rapid development. By the year end in 2006 over 50,000 enterprises from the U.S have made the leap to the Mainland. Read more...

US Cargo Security Bill aiming for 100% scanning for all boxes.

The National Industrial Transportation League is closely monitoring discussions between the House and the Senate staff concerning the implementation of 100% scanning of all cargo moving by air or ocean into the US. With the Automated Manifest System already in place, the Department of Homeland Security considers this step as an additional measure towards enforcing transportation security. Many are concerned that 100% monitoring will create a substantial bottleneck on inward bound logistics and ensure higher costs associated with the process. Read more...

US, Canada and Mexico conclude successful NAFTA meeting.

The North American Free Trade Agreement (NAFTA) eliminated the majority of tariffs between products traded among the United States, Canada and Mexico, and will gradually phase out a number of other tariffs over a 15-year period. As a treaty under international law, NAFTA’s trade representatives emphasized the importance to look for new and creative ways of further promoting trade and new business activities Read more...

EU growth slows in second quarter to 2.5 percent

Growth in the 13 EU-member nations narrowed to 2.5% over one year in the second quarter of 2007, due in part to lower demand in the building sector representing the slowest rate of growth. Europe's manufacturing and service industries also slowed as the pace of orders cooled, indicating turmoil in world credit markets may be starting to weigh on the economy. However, smaller fast-growing eastern European nations managed to keep up their rapid momentum since the beginning of 2007. Read more...

China’s Tax Regime under examination by WTO

After a meeting of the World Trade Organization’s Dispute Resolution Panel, it has announced the forming of a panel to investigate complaints by US and Mexico that a number of China tax breaks and subsidies are in breach of the WTO rules and regulations. The US claimed that China, through subsidizing exports to the US and denying US exporters a fair opportunity to compete in China, is unfairly impacting US manufacturing. Read more...

Bill to be raised taxing all investment.

Senator Charles Schumer is drafting a bill that would raise taxes on all partnership performance fees from the capital-gains rate, currently 15 percent, to ordinary income-tax rates, which are as high as 35 percent. If successful, this measure could lead to the elimination of the capital-gains tax rate for everyone, replacing it with much higher personal rates. The bill that will tax the carried interest earned by all investment partnerships, not just private equity and hedge firms, as ordinary income - is currently being proposed in the Senate. Read more...

TAX

Hong Kong

Company Registrations up 19% in Hong Kong

The first six months of 2007 has brought about a 19.12% increase in the number of companies registered under the Hong Kong Companies Ordinance over the same period of last year, bringing the total number of incorporated companies to over 622,300. Of these new incorporations, 316 were new overseas companies establishing their Asian presence in Hong Kong, furthering acknowledging Hong Kong as the gateway to Asia, and China in particular. Read more...

China

Tax net to cover more people.

China will tighten control on taxation of personal income, as remarkable effects have been seen since its last move in the first half of 2007.
At the beginning of this year, all who earns more than RMB 120, 000 a year in China is required to declare their incomes before March. By April, there are more than 1.6 million people have their incomes declared, contributing a year-on-year growth of 28% in personal tax revenue in the first half.Firms in high-income sectors and those that declare less tax for their employees compared to their counterparts will be the target of a new move by the taxman. A weak tax monitoring system and low-awareness of payments have hindered the tax watchdog. Read more...

North America / Europe

A Third of UK’s largest firms pay no corporate tax.

Only 7% of the 700 largest companies in the UK, mainly concentrating in banking, insurance, oil and gas, contributed two-thirds towards the $24.4 billion GBP paid in corporate tax in 2005/6 financial year. The majority of reasons cited are low profits in certain industries, but the likelihood that many of these companies could be offsetting the cost of borrowing against their taxable income, to all but eliminate their corporate tax bills, cannot be ruled out. Read more...

New Doggett Law could drastically raise taxes on Multinationals

Pressure is growing in Washington to force a tax ,known as the Doggett law, as a legitimate crackdown on cooperate tax avoidance, on foreign companies with subsidiaries in the United States who move funds back to their parent countries that have more favorable tax rates. However, business groups are saying the measure could deter firms from investing in the United States.The vast majority of foreign multinationals would not be affected because they are organized in developed countries with which the United States has an income tax treaty. The offset is focused on multinationals organized in non-treaty countries that have little or no income tax and who avoid U.S. taxation on their actual earnings by siphoning off revenues though payments to parent corporations in tax haven hideaways.Read more...

AIM Investors face potential GBP1.4Bn tax hit.

Investors in shares listed on the London Stock Exchange's Alternative Investment Market (AIM) could face a potential storm coming their way in the guise of huge losses even if the smallest changes are made to business asset taper relief. Business Asset Taper relief is still being scrutinized by a parliamentary committee, following claims by trade unions and some MPs that it is misused by some private equity investors to reduce their tax bill. Read more...

Danish Tax Cut 2007

Under the proposed reforms, announced by the government, the income ceiling for the middle and top income tax brackets will be raised to DKK353,000 per year from DKK304,100, and to DKK381,300 per year from DKK365,000, respectively in a bid to stimulate the labor market and improve incentives to work. Read more...

Offshore

OECD Removes Marshall Islands off tax blacklist

The Marshall Islands, which was recently blacklisted by the Organization for Economic Co-operation and Development (OECD) as being an uncooperative tax haven, has recently been removed from the list. The country was removed from the list as it committed to improving transparency to establishing effective exchange of information in regards to tax matters. Read more...