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News : International Last Updated: Aug 20, 2009 - 7:22:53 AM


Asia recovers but challenges ahead as China cancels steel plant sale in response to worker protests
By Michael Hennigan, Founder and Editor of Finfacts
Aug 17, 2009 - 9:23:51 AM

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Two Michael Hennigans sample the local brew at SOULedOUT, Kuala Lumpur, July 2008.

With Japan reporting today that it had emerged from the severest recession since 1945, its annualised growth of 3.7% in the second quarter compares with the four emerging Asian economies which have reported GDP figures for the second quarter (China, Indonesia, South Korea and Singapore), at an average annualised rate of more than 10%. Asia is back not as before the crisis but still in a very strong position. Meanwhile, China announced the planned sale of a state steel plant in response to worker protests.

Japan may end the hegemony of the LDP party in the August 30th general election but it will continue to have a hard slog and while the export sector has resumed growth, the economy is in dire need of reform, in particular the low productivity service sector. In recent years, consumer spending has remained low because of limited wage rises and about 35% of the workforce are temporary workers earning less than the Irish hourly minimum wage of $12.30, in a high cost economy. This trend bodes ill for an economy with an aging population.

Government estimates show that the working-age population is expected to shrink 9% in the next decade.

According to Morgan Stanley, the household savings rate has fallen from 10% in the 1990s to about 2.2% in 2007.

In the emerging economies, dominated by China, a fall off in demand for exports in Europe and the US may not be replaced rapidly by a boost in local demand. However, the Asian economies will seek to maintain a high level of reserves as the experience during the crisis was that it was an important support for both a currency and economy.

China has announced measures to improve health insurance and thereby reduce fears of incurring high health costs but generally, wages remain very low.

The Pearl River delta region of Guangdong, accounts for about a third of national shipments and exports fell 18.3% in the first six months of this year from 2008, to $153.4bn. However, that is more than the province generated in the first half of 2006, which was viewed as a very good year for China’s exporters.

A supervisor with 10 years experience and with responsibility for dealing with export customers, can earn $350 a month; a factory operative would earn up to $150.

In Malaysia, a factory operative from Nepal, working 12 hours per day (including overtime), could earn $280 a month for a 7 day week -  - 84 hours.

The Commission on Growth and Development asked if the growth strategy that worked well in the past 50 years, will continue to be an attractive option in the future for developing countries? It said no country will remain hypercompetitive in labour-intensive industries indefinitely. At some point, the country’s surplus labour will be absorbed and wages will rise. But with 55% of China’s population still living in rural areas, and 72% of India’s, the wait could be quite long.

The recent recession has resulted in the collapse of thousands of small Chinese companies, which had little if any financial control systems. That should benefit the economy by improving the prospects of the better run companies but very low wages compared with the developed world can cover a lot of inefficiencies.

Chinese Premier Wen Jiabao told a National People’s Congress press conference in March 2007: "The biggest problem with China's economy is that the growth is unstable, unbalanced, uncoordinated, and unsustainable."

Last week, papers published by the IMF, looked at two of the biggest questions for China’s economic future: what will happen to the export manufacturing base that has driven so much of its recent growth? And what other options are there to create more new jobs for poor farmers eager to better their lot?

In the first paper, the authors say Japan’s share of world exports peaked around 10%, but has come down since then. China hasn’t yet reached that level, but the authors plot out a possible scenario in which it eventually achieves a market share of around 20% of world exports.

However, they argue that getting to that level requires some heroic assumptions that are unlikely to be achieved.

To gain more market share, China would have to cut prices, which would need its manufacturers to become either more efficient, accept lower profits, or extract higher subsidies from the government.

The paper says productivity has been rising rapidly in China, but the increases have slowed in recent years, and will get more difficult to achieve as the country closes the technological gap with the rest of the world.

In the second paper, the authors attempt to estimate how many jobs could come from producing goods and (mainly) services for the domestic market.

The paper says compared to other countries at the same level of income, China has a much lower share of people employed in the services sector, and a higher share of people working in agriculture. That suggests China could create a lot of new jobs in services that would be filled by former farmers: in today’s economy, they estimate 70 million, or about 9% of the workforce.

The authors say there’s a lot of potential outside the export sector. But the shift toward an economy more driven by domestic consumption and services, rather than exports and manufacturing, is unlikely to be completely smoothly.

Closing down export-focused companies and starting up new domestic-focused ones will inevitably leave some people without jobs for a time. And people trained in one industry can have difficulty in switching to a new one. The authors suggest the government could minimize those problems by policies that support the transition and boost incomes, rather than having the change forced upon workers.

China's state news agency Xinhua reported Sunday, that authorities in central China's Henan Province ordered an immediate halt to the takeover of a state-owned steel factory by a private company after mass protests by the factory workers.

The decision was taken by the provincial committee of the Communist Party of China (CPC) and the provincial government in an attempt to calm workers at the Linzhou Iron and Steel Co. Ltd., based in Anyang City, who protested a planned takeover by Fengbao Iron and Steel Co. Ltd.

Three weeks earlier, rioting workers beat to death an executive who had been overseeing the sale of another state-owned steel company.

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