Revised Blog 1: Don’t Coddle China’s Domestic Business

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Which was the most rapidly growing country in the past decade years? If we collect 100 answers, there will be no surprise if 99 answers are China. China’s GDP increase rates were about 10 percent for years. So which part contributed most to China’s impressive GDP growth? If we collect 1000 answers, there will be no surprise if 999 answers are exports. Great exporting power has become a tag of China. “Made in China” can be found in apparels, groceries, toys, and electronics all over the world. Low wage labors provided China an essential advantage on exports. Squeezing cost made Chinese firms be competitive on price war. Without doubt, exports did devote a lot for China’s development. Though, meanwhile, problems also became more and more dazzling. More important, the original cause of the problems was that Chinese domestic businesses were coddled excessively.

“Exports fell 3.3% in January from a year earlier, data from the General Administration of Customs showed Sunday. This was a sharp deterioration from December’s 9.7% rise and short of a 4% increase expected by economists polled by The Wall Street Journal”. This was a brief report about Chinese export in January this year. China experienced the slowest developing period last year with about 7 percent GDP increase rate. Though Chinese governments proposed to push Chinese economy bouncing back to a speedy pace, there were challenges in front of them.

China relied too much on exports. When losing price advantage and facing more competitions from developing countries, China had no enough effective ways to deal with this trouble. Taking car market as an example, we may found that China almost had no competitive independent domestic car business. “Even as China’s car sales grow at a 10% annual clip, many of its domestic auto makers are expected to report 2014 results that will be their worst in years. Great Wall Motor Co. , considered a rising star, projects a 2% decline in net profit for 2014, its first year-over-year drop since 2008. Geely Automobile Holdings Ltd. , whose parent company owns the Swedish Volvo brand, warned of a roughly 50% slump in last year’s net profit, its first year-over-year decline since 2002. Great Wall cited hefty research expenses and Geely blamed its drop on a 24% slump in its overall car sales”. Chinese government set a high tariff on foreign cars with the aim of protecting and developing domestic business. Things went athwart, Chinese domestic car companies relied on government’s protections excessively that they failed to build up a true competitive independent domestic business. They knew that even if they had no stronger power than foreign competitors, the government will help them by introducing policies or providing them fund. Too much state owned firms depended on government’s compensation on their budget deficit to be alive. Furthermore, along with China’s rapid growth, more and more Chinese people have enough money to purchase importing cars, regardless the high tariffs. This caused a harmful consequence to Chinese domestic car business.

Car market is just a tiny view of China’s domestic business. While losing price advantage and exporting power, China need to find a way to build up reliable independent domestic business. Otherwise, China’s development might endure a more and more sluggish circumstance in the coming years. Actually, the most urgent mission for Chinese government is to encourage domestic firms discovering advanced techniques but not to continue to protect them too much. Chinese business should not be treated as a coddling boy but a competitive soldier.

3 thoughts on “Revised Blog 1: Don’t Coddle China’s Domestic Business

  1. Linda Sun

    “which part contributed most to China’s impressive GDP growth? If we collect 1000 answers, there will be no surprise if 999 answers are exports. Great exporting power has become a tag of China.” I am not sure where you got this information. If you look through the Chinese National Annual Statistic Book (http://www.stats.gov.cn/tjsj/ndsj/2014/zk/html/Z0318e.htm), you will find out that export actually only contribute really small portion of GDP in China. (Consumer and Investment makes a lot contribution)

    Overall it is a good article. Though supporting local business is a key job for government so that a nation (especially for a developing one) could build a competitive brand. But Chinese government makes the market too comfort, which lead to an adverse selection problem: The more convenience Chinese government gives, the worse the local businesses are.

  2. Chang Tian

    The net export, includes both exporting and importing parts, is one aspect that affects Chinese GDP. The discussion in your post can be split two these two parts, so from my perspective it is well-organized. With declining in exporting and a slump in developing domestic market, will it lead to a shrink in Chinese production?

  3. Max Haskin

    I definitely like your thesis that the government shouldn’t coddle domestic businesses. In order for China’s companies to become more competitive they need to focus on innovation. So the fact that Great Wall “cited heft research expenses” could be a positive sign, that could pay dividends in the future.

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