China Special
In a one-party state like China, the political environment has a very strong impact on the country's economic and social development.
In general, there is a consensus regarding the goal of China's economic development toward a market economy. The main differences of opinion arise concerning the degree of state intervention in the economy, but there is no possibility of returning to the old planning system. The most significant political problem, and also the main obstacle to China's economic development, is the existence of powerful interest groups linked to state-owned enterprises, ministries, local governments, or a combination thereof. These groups are adept at using political and ideological arguments to protect their own interests and maintain the status quo, with the ultimate goal of enriching themselves. In this respect, the shift of power to local governments is one of the main political risks facing the Asian country, as this will lead to tensions between the different provinces, according to InterChina Consulting in a report on "China's Economic and Social Reality." The consulting firm also considers a trade war with the United States and Europe highly likely, as their governments, under pressure from their electorates, are already beginning to exert pressure on China. InterChina believes that Europe will introduce anti-dumping measures against China within two years. Furthermore, a conflict with Taiwan is unlikely, as it would mean the destruction of both economies.
According to InterChina, with Hu Jintao in power, a shift in political development and economic prospects will occur, moving from a society focused on economic growth towards what the party calls a "Harmonious Society"—meaning that growth at any cost will no longer be the focus. This will be reflected in the government's commitment to reducing GDP growth to 7%; increased environmental protection in state investment plans; the creation of a sustainable healthcare and hospital system; and efforts to combat the unequal distribution of wealth between urban and rural areas and to fight unemployment.
Economic outlook
By 2007, China is expected to show growth between 10 and 12%, with a structural change: the Investment item will be reduced to the current 45%; the Trade Balance item will see a reduction in its overall contribution (exports will fall to +10% and imports will increase to +20%); Domestic Consumption will appear, for the first time in the history of capitalist China, as a significant item; inflation will be between +4 and 5% and the RMB, between 5-8%.
China's medium-term outlook (2009) for the InterChina economy is for continued growth of 8-10%, while in the long term (2010-2020) growth is projected to slow to 5-6%, but without falling into a crisis. By 2020, China will be the world's second largest economy.
The factors that could destabilize social reality will be unemployment and corruption, with an underlying risk of widespread protests in the long term.
Regarding business prospects, China has decided it no longer wants to be an exporter of low-consumption goods. In fact, it has already begun dismantling its own textile industry, using Vietnam as a restructuring hub for the Asian nation. Furthermore, China aims to become a consumer-driven economy, which will generate significant investment opportunities for foreign companies. For investors, the most productive sectors will be: Infrastructure and Environment, Energy, Distribution and Retail, Services (financial, insurance, environmental), and manufacturing (components, machining, and machine tools). The rise in Chinese nationalism, barriers to entry, increased operating costs, and high employee turnover are the major challenges foreign companies will face.
What is changing
In 2006, there was a significant increase in economic protectionism and government support for Chinese companies. New industrial protectionist policies, regulations on mergers and acquisitions, and the Competition Law (currently being drafted) will have a major impact. Foreign companies will need to adapt to this new situation: the existence of lobbying groups, the resurgence of joint ventures, and the "First Mover Advantage."
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