by Peter Hann

Created on: August 28, 2010

Although there are signs that the era of cheap manufactured exports from China is coming to an end, this process will happen very gradually. There are some pressures in China that will eventually lead to an end of the era of cheap production, even though the full impact of these factors will not be felt for some time. China needs to become less reliant on exports for economic growth, and also needs to move away from cheap manufacturing towards high tech industries and advanced manufacturing. Some recent government policy moves point in this direction but the change of direction cannot be achieved in just a few years.

Domestic demand

An economy that relies on export-led growth is always dependent on levels of demand abroad. As has been revealed by the recent financial crisis, world demand is not always at the same level and a crisis can lead to a drop in demand for Chinese goods. To avoid the consequences of such a drop in foreign demand, China must eventually begin to replace the reliance on foreign demand for exports with increased domestic demand for Chinese goods. This will only happen when the incomes of Chinese people have risen sufficiently to create demand for Chinese goods that can replace some of the demand for Chinese exports. As Chinese wages still have some way to go to catch up with other parts of the world, this change will take some time, especially where excess labor continues to cause a downward pull on wages.

High technology industries

There have been signs for some time that China is attempting to move away from the reliance on cheap manufacturing and move into the export of high technology products. One such sign is the removal of most of the tax reliefs previously given to foreign companies in a wide range of different industries.

For example, the Enterprise Income Tax Law of 2007 and the implementing regulations phased out most of the tax reliefs previously given to foreign companies. The law does however give a reduced tax rate to high tech enterprises in encouraged sectors, and a tax credit is available for investments in environmental protection, energy, water conservation and certain safety equipment.

Chinese manufacturing is aiming to move further into the area of up-market, expensive high technology equipment. China’s tax law also offers a high tax deduction for research and development activities, in an effort to boost the amount of innovation taking place in the economy. Government policy is directed at diversifying from

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