There are both pros and cons to this as outlined in China Rushes Upmarket.
- In the face of scandals, Beijing shifts incentives to higher-quality exports
- China has long prided itself on being the world's workshop. Shipments of labor-intensive, low-cost goods—everything from toys to tube socks to tires—turned the country into an exporting colossus, powering growth of nearly 10% a year for the past three decades.
- But as Beijing is now realizing, there's a downside to that strategy. Exports of tainted pet food, toothpaste, and Thomas the Tank Engine trains threaten to provoke a global backlash against products that say "Made in China."
- These controversies have helped spur a big policy shift in Beijing. China's technocrats are introducing a series of measures designed to change the face of its export industry. On their own, each of these initiatives may not seem momentous. But as a whole they define a major change in China's industrial policy—one that favors higher value-added industries such as sophisticated electronics and heavy machinery, possibly at the expense of low-cost manufacturing and assembly.
- And they're sure to help boost efforts by companies at the low end to move away from simple production for multinationals and develop their own designs and brands. The potential payoffs: a cleaner environment, better-paying jobs, and an improved reputation for the country's goods.
- It won't happen overnight. But the Chinese government is using a combination of carrots and sticks to get companies to fall into line. Twice in the past 12 months, Beijing has cut export subsidies, eliminating rebates on the 17% value-added tax for more than 500 types of high-polluting goods such as fertilizer and leather, while further whittling down rates for some 2,800 other low-tech products.
- And revisions to China's contract law, approved in late June, are likely to drive up wages on the mainland. That could force companies in low-margin industries such as footwear and apparel either to upgrade their product mix or shift production to cheaper locales in Southeast Asia.
- Beijing also is tightening standards on pollution, which could make investments in sectors such as steelmaking, coal, and cement less attractive. "Environmental degradation has become a political-stability issue in parts of China,"
- Beijing's edicts will speed a process already set in motion by market forces. The yuan has risen 9.4% against the dollar over the past two years—not enough to placate Washington, but sufficient to cut into the profit margins of Chinese exporters, particularly those at the bottom of the pyramid. Factor in rising wages and tougher competition from lower-cost countries such as Vietnam, and it's not hard to see why some Chinese manufacturers feel as if they're caught in a vise.
- "For years, China has beaten its competitors with low costs," says Liu Xueqin, a researcher at a think tank affiliated with the Commerce Ministry. "This strategy has now run its course."
Takeaways: Nothing especially new here aside from the fact it's interesting to see, aside from market forces that we have already started seeing, the government is prodding and pushing these same themes creating an even more accelerated pace of change. From an economic standpoint it is quite fascinating to watch this - so many moving parts, moving at a pace unknown in history. Those communists have to be some of the most interesting capitalists one has ever met....
