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"This confirms that China's advance
along the value-added chain is still in
its early stages," BCA Research says.
However, it must also be noted that China
is increasingly investing in Research and
Development (R&D), according to the
report. Spending on this now accounts for
almost two per cent of the country's GDP.
"This has yet to show up in increased
innovation and product sophistication,"
BCA says.
But at the very least it would appear
that the government has its mind set on
changing this trend.
The BCA report's authors believe that
the key to China moving up the value-added
chain lies in its ability to initiate reforms
in the public sector and promote innovation
for the private sector.
Working in China's favour, the report
adds, is the entrepreneurial skill and dedication
to hard work of its people. Additionally,
small and medium sized companies are "very
flexible and nimble" when opportunities
arise.
"All of this bodes well for a budding
innovation culture," it said.
Education levels are also rapidly improving
in China with more Chinese nationals now
studying abroad, a fact that "will
ultimately help the nation's competitiveness".
These students will not only return to
China with a high standard of education,
but will also benefit from the international
exposure, which will introduce them to new
and innovative ideas from the developed
world.
Of course there are still a number of
issues to watch. Already we looked at the
BCA Research authors' concerns regarding
China's lagging R&D capabilities. But
this will hopefully be remedied through
increased spending and ever improving education,
both at home and from abroad.
But there are other factors that the
report refers to that must be addressed.
BCA Research sees the stalled structural
reforms of the past few years as being a
hindrance to China's transition to a high-value
goods manufacturer.
It notes that the Chinese government,
headed up by the ex-President Hu and ex-Premier
Wen, spent the past decade riding the "upwave
[sic] in the nation's growth that was created
by the structural reforms in the 1990s and
the WTO accession in 2001".
However, a lack of reform since then,
the report says, augers for lower productivity
and lower overall growth going forward.
"In contrast to the late 1990s and
early 2000s, when the public sector's influence
in the Chinese economy dropped substantially,
the role and the size of public sector and
state-owned companies have swelled in recent
years. In fact, since early 2009, China's
growth has been driven by massive credit
expansion that makes us very concerned about
the economy's medium-term outlook,"
it said.
The authors add that much of this credit
has been filtered to state-owned and government-affiliated
companies, rather than the private sector.
BCA Research believes that this has resulted
in "vast amounts" of misallocated
capital, which in turn could impact negatively
on the country's growth in the medium term.
The report also points out that investments
in equipment and machinery has been declining
in recent years, while construction spending
has soared. This will also hamper China's
growth, it said.
The bottom line, says these authors,
is that the country's new policymakers,
led by President Xi and Premier Li, will
need to "launch a new wave of reforms
with the purpose of curbing the role of
the state and public institutions in the
economy and encouraging more private investment
in research and development and innovation".
If the new government can do this, then
it would appear that the concerns outlined
by the BCA Research report's authors, might
well be assuaged and China's path to moving
up the value chain will press ahead.
As China stands at the crossroads today
many observers will no doubt be curious
to see whether it can take that next step.
It has already proven its strength in low-value
goods manufacturing. Will we now see the
second stage of China's growth story meet
with as much success as its first stage
did?
It will be interesting to see.
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