The Chinese road should be travelled by SA

In 20 years China has achieved an astonishing amount of development; a strong and capable state seems to be the silver bullet

29 JULY 2017 - 09:35 TUMELO CHIPFUPA

Picture: REUTERSPicture: REUTERS

Sometimes travel really does broaden the mind, and can give you a fresh perspective on your own country and its challenges. I was therefore very keen to take part last month in a week-long visit to China, as part of a South African delegation invited by the Sandton-based Bank of China to participate in small-and medium-enterprise conferences aimed at promoting networking between Chinese small enterprises and their Brics peers.

While there are elements of Chinese society that are unusual for those of us living in a nation with a liberal constitution, there can be no doubt that when it comes to the economy, the Chinese are getting a lot right and we can profit from their experience.

It had been 20 years since my previous visit to China, and what stood out most was how much development and modernisation there has been. Twenty years ago China was setting out on its growth journey from a low-income to a middle-income country. Then I was on a visit to the Xiamen Special Economic Zone, whose newly built factories were bustling with young workers newly arrived from the countryside.

The Chinese economic growth model is evolving and the country is groping towards a new and different way of doing things. Over the past 30 years, China grew on the basis of cheap labour, producing manufactured products for export markets. The Chinese have also saved a lot of their income and invested heavily in public infrastructure that improves the competitiveness of the economy and the living standards of citizens. The Chinese household sector annually consumes approximately 37% of the country’s income. The comparable figures for SA and the US are 60% and 68%Today, China is again on the move, seeking to make the more difficult transition from an upper middle-income economy to joining the exclusive club of rich high-income economies.

The high savings, export-led, growth model is, however, likely to encounter serious challenges. For one, labour is becoming increasingly expensive in China due to a tightening of the labour market — and China’s currency, the renminbi, has appreciated, thus increasing other local costs for Chinese manufacturers. Because of pressure from China’s trading partners, particularly the US, the Chinese have not been as quick to restore competitiveness by devaluing the currency as they may have done in the past.

My understanding is that the Beijing government is switching to a new model in which they grow not just on the basis of cheap manufactured exports, but by increasing domestic household consumption, thus boosting sectors such as services and tourism; and by promoting innovation and technological change in the economy.

Services are already a huge part of economy; the internet is well integrated, although access to some sites is restricted. Domestic tourism has also been growing briskly. The Chinese government’s current five-year plan aims to grow tourism to 12% of GDP by 2020.

China has increased its spending on innovation from just below 1.5% of GDP in 2008 to more than 2% of GDP in 2014. In SA, by comparison, 0.76% of GDP is spent on research and development; China spends 2%.Increased innovation is intended to enable the Chinese economy to overcome the dreaded middle-income country trap. This is when a country’s growth rate begins to slow down once it reaches a certain percentage of the income of rich developed countries — as has happened with our economy and the economies of South American countries such as Brazil and Argentina.

One central insight I gained and consider of great relevance to both SA and our neighbours: the relative size of government and its participation in economic activity is not what determines success in pursuing development. A strong and capable state appears to be the silver bullet that has defeated under-development in both China and the Asian tiger economies that have preceded it in the sustained, fast economic-growth lane.

Unlike in SA, where the civil service is often seen as an employer of last resort, employment in the Chinese civil service, as in Singapore, is considered very prestigious and the best and brightest aspire to have careers as civil servants.

China, Singapore, Japan, Hong Kong and Taiwan have very different economic structures and have followed different growth strategies. Foreign-owned multinational corporations and state-owned enterprises have been prominent and key in the development of China, whereas locally owned conglomerates, called chaebols, were key in Korea, and hi-tech, small-and medium-sized entrepreneurial firms were dominant in Taiwan’s growth miracle.

Under the leadership of Xi Jingping, China has outlined a new, long-term strategy for engagement with the world. It goes by the name "One Belt, One Road" and forms a blueprint for tighter integration between China’s economy, its neighbours and the broader world. The plan partly involves ambitious outward investment plans, particularly in infrastructure projects, and has been compared to the US Marshall Plan following the Second World War.Chinese investors have been much criticised in Africa for some of their business practices, such as minimal to non-existent procurement from local businesses and the employment of Chinese nationals even when equally competent local people are available. Chinese re-engagement with the world, as a rising superpower, is a relatively new phenomenon and in that context I think it is understandable that mistakes will occur and there will be lessons learnt. There is, however, no mistaking that the Chinese are intending to stay engaged with the broader world for the long term.

China’s new outward engagement with the world and its changing growth strategies need to be seen as a source of opportunities for local South African business. South African companies can enter into joint ventures in SA and throughout Africa, where they can leverage their superior knowledge of local business. There is also the opportunity to leverage relationships developed in SA or in Africa with Chinese companies as a way of finding an entry point into the Chinese market.

Chipfupa is a founding partner of Cova Advisory. He visited China as a guest of the Bank of China, and attended the Brics SME Cross-Border Investment and Trade Co-operation Conference.