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Zhang Jun: China is almost the only country that can maintain reasonably low prices
Economist at Fudan argues high productivity as a result of robust competition is the key behind China's pricing advantage (not dumping or subsidies), and it has much potential in the digital economy.
At a time when China faces repeated investigations regarding subsidies and dumping, the Dean of the School of Economics at Fudan University seeks to underscore the exceptional competitiveness of the Chinese economy. The robust competition of Chinese economy extends to both domestic and international markets and encompasses both the supply and demand sides, argues Professor Zhang Jun.
He also demonstrates how the Chinese economy has thrived within a favorable cycle of production, consumption, and logistics, a cycle that has endured for several decades thanks to China's vast market, numerous market participants, and specialized competition within niche markets.
Prof. Zhang Jun is Distinguished Professor of Humanities and Social Sciences, Dean of the School of Economics, and Director of the Research Institute of Chinese Economy at Fudan University. He was previously featured on Pekingnology, a sister newsletter under CCG.
Reasonably Low Prices Benefit Consumption Expansion and Productivity Improvement
China's CPI Still Awaits Recovery
Since the beginning of this year, especially from the third quarter, there has been significant improvement in the overall consumption expenditure, but it may still be lower than market expectations. This is largely due to the impact of the COVID-19 pandemic, which has severely affected the real economy, especially micro, small, and medium enterprises (MSMEs), and self-employed individuals. Many are struggling to recover due to their inherent fragility and inability to withstand such shocks. These businesses represent the backbone of 99% of families [being the biggest employers], hence the substantial impact on consumption. Currently, overall consumption expenditure relative to nominal GDP still needs further enhancement.
Consumption in China generally falls into four categories: basic living consumables, durable goods, services, and housing consumption.
Housing consumption is undergoing a significant adjustment due to instability in the real estate sector. This has delayed many families' housing-related consumption. Additionally, purchase and loan restrictions in many first and second-tier cities have curbed housing consumption, particularly for those seeking to improve or expand their living space, due to policy constraints, casting a negative impact on overall household expenditure.
The consumption of durable goods has been postponed following the pandemic, as income expectations for consumers have decreased. This postponement extends the replacement cycle for durable goods, impacting household expenditure in the short term.
I've also noticed that, especially since the second quarter, there has been a noticeable rebound in certain areas of consumer spending. For example, the demand for short-distance travel has risen rapidly, often accompanied by significant service consumption and hospitality expenses.
However, a micro-analysis of consumer behavior shows that while travel consumption is rebounding quickly, most consumers, primarily young people, seem to prefer relatively cheaper options. Therefore, the overall expansion of consumption is slower than market expectations. There is a prevailing view that "cheap travel" or a downgrade in consumption is trending, with many opting for more affordable travel and accommodation options, which may require time for gradual improvement.
Importantly, as the economy continues to recover and income expectations gradually restore, there will likely be a corresponding recovery and improvement in the levels and structure of consumption.
The current Consumer Price Index (CPI) remains at a relatively low level, indicating that the expansion of consumption has not yet reached its potential, hence weak signs of growth in prices. This is a reflection of the need for further recovery in overall consumer demand.
China is almost the only country that can maintain reasonably low prices
So far, the reputation of Chinese products for their combination of high quality and low prices in the global consumer goods market has remained largely unchanged. Throughout the 1980s, 90s, and into the 21st century, China's exported goods primarily competed on price in international markets. Nevertheless, the price advantage of Chinese products in today's international market cannot be compared to that of earlier times.
In the 1980s, China's main export sector was township enterprises, which accounted for more than half of its exports. These enterprises exported the most basic of processed products, such as toys, plastic products, shoes, wool sweaters, and other very cheap items. At that time, the international market's perception of these products was that they were cheap but of lower quality.
Back then, China exported a significant quantity of labor-intensive, minimally-processed products because labor was cost-effective. Many rural workers left their farmland, but not their home villages, to engage in basic processing in rural enterprises. The equipment and technology were relatively backward and outdated, often discarded by state-owned enterprises (SOEs). Despite this, they were able to manufacture products of sufficient quality for export, which gained popularity in the global market. For example, during holidays like Christmas and Halloween, which involve a significant demand for disposable items, developed nations either didn't produce these goods or manufactured them at very high expenses. Many township enterprises in China, especially in southern Jiangsu and Zhejiang, both located in Eastern China, seized this opportunity and exported these products. Since these items were disposable, quality was not as crucial as long as the price was low. This gave them a strong competitive edge in the international market.
However, the situation today is different. China has started exporting a large number of technologically complex products. Today, the percentage of roughly processed export products is minimal, with a significant share consisting of complex manufactured goods. Among these manufactured products, aside from those manufactured by foreign capital for export, the largest proportion still comes from China's domestic enterprises.
Consider eyeglasses that China exports, produced through various types of OEM production, it becomes clear that China has the capability to manufacture products for well-known international brands. At the same time, China's domestic eyeglass brands have also gained significant popularity on the global market. This success can be attributed not only to their affordability but also to their superior quality. It illustrates the enduring principle of providing high-quality products at competitive prices, which has enabled China to maintain its price advantage over the past four decades.
However, today's pricing advantage differs from that of the past. The present pricing advantage is the result of significant quality improvement, genuinely offering high quality at affordable prices. This showcases the rapid enhancement in our productivity. A product that combines top-notch quality with competitive pricing signifies high productivity, and this is the primary factor enabling China to sustain its cost advantage in the current market.
Of course, Chinese labor is still relatively cheap, and many elements are relatively inexpensive, contributing to low costs. However, this only accounts for a portion of the explanation. Without a substantial boost in productivity, our products, especially those with intricate technology, would not be able to sustain a competitive pricing advantage in the global market.
In my opinion, on a global scale, China's biggest economic advantage is not cheap labor, but its highly competitive economy. This intense competition was behind the rapid improvements in China's labor productivity.
Any product that is produced will be mass-produced in China in no time. Due to competition and economies of scale, the cost of the product will be contained at a competitive level, making its price affordable. And this process does not sacrifice product quality; on the contrary, product quality improves rapidly.
Globally, China is probably the only economy that can achieve reasonably low prices. Many developed Western countries often misunderstand this situation, attributing China's low prices to deliberate dumping tactics aimed at defeating competitors. This is a huge misunderstanding of China. The products China manufactures in large quantities now are technologically complex, encompassing high-quality consumer goods, mechanical and electrical products, and electronic products. Labor costs account for a very small proportion of these products, and without improvements in productivity, it would be challenging to reduce the costs.
China did not rely on dumping tactics to establish its presence in the international market. The high competitiveness of the Chinese economy is evident across various industries, characterized by the presence of numerous producers. This is in contrast to developed countries where a few dominant players often monopolize entire industries. In China, except for strategic upstream sectors, it is nearly impossible to find an industry that is dominated by just a handful of enterprises. The prevalence of intense competition across industries has played a significant role in driving rapid improvements in the overall productivity.
The market competition and supply chains in China are highly decentralized, driven by a market-oriented approach with full-fledged competition and economies of scale. The production of complex technological products typically involves the collaboration of hundreds or even thousands of enterprises that provide intermediate goods and components. Each link in this chain operates within a competitive market. As a result, any technologically advanced new product that can be manufactured in China will undoubtedly enjoy a significant price advantage in the global market.
In short, the extensive division of labor and specialization, combined with the vastness of market, has led to the highly developed and efficient supply chain system in China. Numerous enterprises contribute components to a product, with each part being manufactured with utmost quality and cost-efficiency. Consequently, the end product naturally becomes high-quality and competitively priced in the international market.
Reasonably Low Prices Can Enhance People's Welfare
China's economic advantage lies not only in its immense market size, with a population of 1.4 billion, but also from its remarkable efficiency in coordinating between supply and demand across various sectors. Both the demand and supply sides in China are highly competitive, without the formation of monopolies seen in some countries, where even the demand side can wield monopolistic power.
It is crucial for China to leverage its vast domestic economy to promote the dual circulation of international and domestic economic flows. This entails eliminating monopolistic forces and ensuring robust competition on both the supply and demand sides.
The vitality, or rather resilience of the Chinese economy stems from its competitiveness. Across the country, from major cities to small and medium-sized towns, from every county to every street, every region of China functions as competitive entities — not to mention the numerous enterprises.
Under a highly competitive landscape, the reasonableness of costs and prices can be consistently achieved. Why do I highlight the word "reasonableness"? Because it is achieved through improved productivity, leading to reduced costs and prices, not through subsidies or dumping.
China also enhances the welfare of its consumers through consistently maintaining the advantage of low prices. In fact, without the substantial export of Chinese products to developed countries, their citizens would not experience such a high level of social welfare at a given income level.
I believe that a significant reason why the welfare standards in developed countries in Europe and America can stay elevated is largely attributed to the rise of China. China has consistently supplied them with a vast array of high-quality yet affordable products. Without this, it would be challenging to envision a middle-income family enjoying such a decent and comfortable lifestyle. China has made a substantial contribution in this regard.
The same is also true domestically. The more high-quality and affordable items Chinese citizens have, including cars, mobile phones, other electronic products, and daily consumer goods, the higher their welfare level is.
I believe maintaining reasonably low prices and cost competitiveness is undoubtedly a positive factor for expanding overall consumption expenditure, which in turn drives forth the economy. It is also highly beneficial for promoting a robust domestic market and the positive interplay between domestic and international markets.
As an economist, I understand that if monopolistic powers form in many consumption areas, consumers suffer. Monopolizing the supply of a product leads to high prices and no incentive to reduce costs.
Of course, China must also acknowledge the forthcoming challenges. While China can sustain competitive prices in the manufacturing sector, replicating this in the service industry poses challenges. Presently, China's service industry costs are relatively low in comparison to developed nations due to its lower per capita income.
Nevertheless, the concept of labor productivity in the service sector diverges from that in manufacturing. In manufacturing, higher labor productivity equates to cost and price reduction. In contrast, the more advanced and upscale services are, the more expensive they are since labor reduction is challenging in the expansion of services.
In the future, as the shift from physical goods to services in consumption becomes more pronounced, overall consumption spending is expected to accelerate. This is because services tend to be relatively expensive, especially higher-end ones.
This transition is a developing trend. In developed countries, service consumption typically constitutes a larger portion of household spending. Although it is currently at a relatively low level in China, the country is progressing toward a stage where the share of service consumption in total household expenditure will rise.
Currently, consumption expenditure accounts for a relatively small fraction of China's GDP. This is primarily attributed to the dominance of physical goods in people's consumption, with services representing a smaller proportion. However, as the share of service consumption grows in the future, it will contribute significantly to the overall GDP from consumption expenditure.
Smooth Circulation Leads to Reasonably Low Prices
Ensuring a smooth flow in production, logistics, and consumption is crucial. Sustaining competitiveness in Chins's vast consumer market and on the supply side will set in motion a virtuous cycle. Offering reasonably low prices will drive increased consumption, creating opportunities for suppliers, attracting more market entities, and fostering heightened competition. This competition, in turn, will spur greater division of labor and specialization, enhancing production efficiency. As a result, a favorable cycle will emerge.
In the realm of production and consumption, excluding the service sector, China has upheld this favorable cycle of production, consumption, and logistics for several decades. Throughout this evolution, Chin has seen a steady improvement in the quality of consumer goods, transitioning from basic labor-intensive processing to capital-intensive, technology-intensive, and independently developed technologies.
Ensuring the continuity of this positive cycle in the future is essential as it not only upholds a strong reputation among consumers but also contributes to overall social welfare. This is of particular importance, and I am confident that China will stay on this path for the next 10 to 15 years.
Digital Technology Disrupts Production and Distribution Methods, Accelerating the Favorable Cycle of Low Prices
The digital economy has emerged as a pivotal force in accelerating the establishment of a seamless cycle of production, consumption, and logistics. That is because forming market entry barriers becomes progressively challenging as the economy becomes increasingly digitalized.
Assuming that artificial barriers are not imposed, I am convinced that the digital economy inherently promotes increasing returns to scale. This, in turn, significantly bolsters productivity, enhancing the viability of lower prices.
The advancement of digital technology has played a pivotal role in transformative shifts in the supply chain sector, exemplified by companies like JD.com and their intelligent supply chain systems. These disruptions have revolutionized the management models within the logistics field, ultimately benefiting today's consumers by offering high-quality, cost-effective products.
In the past, logistics efficiency in China suffered due to numerous intermediaries involved in the product journey from manufacturers to consumers, resulting in price markups at each step. However, JD.com's innovative approach to product circulation minimizes unnecessary movement of goods. It involves transporting goods directly from production facilities to nationwide warehouses and subsequently delivering them directly to end-users. This strategy reduces handling frequency, effectively managing annual operational costs to an industry-leading level.
As of June 30 this year, JD.com's fulfillment expense ratio has decreased to 5.8%, marking its best performance in recent years. Since 2016, JD.com has successfully reduced its fulfillment expense ratio by over 20%.
The primary role of digital economy and technology development lies in "thinning" the market, streamlining intermediary processes. In the past, the market was "thick" due to its extensive intermediary layers. Now, with the reduction of these layers, the market has become lean, significantly cutting down transaction costs.
Moreover, the digital economy contributes to lowering production costs. Take JD.com as an example. Leveraging advanced digital technology and consumer data insights, the company swiftly identifies customer needs and business purchasing scenarios through reverse customization models like Customer to Manufacturer (C2M) and Business to Marketing (B2M). This approach aids physical enterprises in developing products that precisely align with consumer needs. It facilitates the formulation of targeted production and sales plans, customizing packaging for different scenarios, shortening the new product launch cycle, and effectively reducing production costs.
Therefore, in the development of the digital economy, the manufacturing industry as a whole enjoys the dividend of technology, while consumers also enjoy the benefits of low prices.
Looking at future trends, digitization will disrupt nearly every field, changing the methods of production and circulation in these industries. I believe that in the next 20 years, the development of digital technology will lead to a highly developed industrial internet, the development of which will bring about disruptive changes to the entire method of production.
Presently, the world has entered the era of the consumer internet, where digital technology is applied in consumer scenarios ahead of the industrial internet. However, in my opinion, the future of the industrial internet will undoubtedly signify a more advanced stage of digital technology application, bringing even greater benefits to consumers in the years to come.