China to Pay High Cost for Cheap Growth Tactics

Thursday, 02 Sep 2010 08:03 AM

By Jacob Wolinsky

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China has recently overtaken Japan as the second-largest economy in the world.

China is a hot area of investment, and many investors are very bullish on the country’s economic outlook.

However, not everything is so rosy about the Chinese economic model.

China has reached its impressive milestone by building an export industry of cheaply made domestic goods, such as clothing and furniture, and was able to do so largely as a result of the low labor costs. Many of these goods end up in retail stores across the United States.

Regardless of its obvious housing bubble, the Chinese economy does not look so great.

China’s export economy of cheap, low-quality goods is already being undermined by other members of the Association of Southeast Asian Nations (ASEAN).

These countries are poised to fill the very same shoes that propelled China to the No. 2 spot in the world. Thailand, Vietnam, Indonesia and the Philippines have labor costs below $250 a month, substantially less than those in China, where labor costs average $412 per month.

It is the intention of the ASEAN to pull the big businesses out of China and encourage growth under its own umbrella.

At the moment, litigation issues, border disputes and poor quality of the member nations' infrastructures are all roadblocks to their economic ambitions. However, talks are under way and deals are being struck that will allow them to begin slicing into China's market as early as 2015.

Only time will tell how much of the market share these countries will be able to claim. Their combined workforce is dwarfed by China's workforce, which consists of more than 798 million people, far more than the combined total of the upstart nations.

Until then, the superpower is left to contend with its own struggles.

Unless major changes are enacted, the country will have to choose between grinding to an economic halt or else accepting that it has created an economic model which is ultimately unsustainable.

If the country opts to accept this notion, the member countries of ASEAN can expect an economic growth spurt as China moves away from the cheap-products ideology that has governed its rise to power.

A word to the wise investor: all that glitters is not gold.

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