China is moving beyond exports to meeting domestic demand

Last week, China was officially acknowledged as the the world's second largest economy, moving ahead of Japan, and second only to the US. While the news was on front pages in India, there was no jubilation in China. The Times of India, had a special feature to mark the occasion. Saibal Dasgupta, the Beijing correspondant of the newspaper, looks at some of the implications and challenges, in the article "The big Bite", on Aug 22, 2010.

Any exuberance about its slotting into second place after the US was limited to those remarks in the People's Daily. Instead, a commerce ministry spokesman cautioned against any sense of glee, pointing out that China still had 40 million people below the poverty line. "China remains a developing country. The quality of China's economic development still needs to be raised. It needs more effort to improve economic quality and people's lives," Yao Jin said.

It is a valid point and the Chinese authorities' public reiteration of their domestic challenges appear to indicate their focus. Overtaking Japan in terms of gross domestic product is not going to change the basic truth:

- China is 10 times the size of Japan

- it is a rapidly ageing country and its one-child policy shows signs of becoming a liability

- the ongoing property boom has the government caught between a rock and a hard place, ie should it keep the elite happy or extend its largesse to a wide swathe of poor and lower middle class people

In addition, President Hu Jintao's drive to develop the relatively backward western and central provinces instead of focusing on the more advanced eastern and southern provinces poses a serious political problem in itself...

There are other problems too. With growing prosperity, more Chinese are learning English and with it a new philosophy — that it is man's right to be free and to have a democratic system of governance. The Communist Party is not ready to deal with this challenge...

In the second article, "Chance to be bigger than Coke in China", Sujit John & Mini Joseph Tejaswi, notes China's growing focus on domestic economy, and foreign investors are taking note.

China appears increasingly open to overseas investors willing to feed this demand. Chinese vice-commerce minister Chen Jian told the Indian delegation: "I hope you can tell Indian entrepreneurs that the Chinese government wants more and more products imported from India. I hope large enterprises from India will have a larger influence than Coca-Cola in China."

Some Indian enterprises have recognized the potential of the Chinese market and moved in aggressively. Mahindra & Mahindra has made acquisitions in China and has become one of the country's largest tractor companies. Automotive components company Sundram Fasteners' Chinese unit supplies both export and domestic markets.

Chennai-based Orchid Chemicals and Pharmaceuticals has a 50:50 joint venture with North China Pharmaceutical Corporation and is focussing on bulk manufacturing and marketing of drugs for the Chinese market. "In four years, we have clocked $50 million in revenues and more importantly, the operations were profitable from day one," says K Raghavendra Rao, CEO of Orchid Chemicals.

Rao says China can be great for Indian business. "The (borrowing) cost of funds is low. We have accessed funds at 6% per annum, which is impossible in India. Labour cost is less than half of that in India. We pay a third for power and fuel in China, when compared with that in India. And physical infrastructure is an intangible benefit for all investors."...