If there is one product that has received way too much attention in 2007, it must be those millions of toys 'made in China,' a tainted few of which caused such an uproar this year. Those 'few,' whether blamed on the faults of foreign importers or on Chinese manufacturers, had a significant impact on global perceptions of the quality of Chinese products. Yet in the aftermath of the Mattel saga Chinese toys, food products and others have all been subjected to stricter quality controls, and have moreover been caught up in 2007 in the general drive for improved quality occurring in China (see CSB's 2007 China Sourcing Review).

As reported in a previous posting, China's toy-making heartland in Guangdong province stated already by late November that global demand for its toys had rebounded from the recall dramas of earlier. In the end nothing much has changed, because with Chinese toys still cheap and their quality improving, demand for them will not abate. 

But not so for Barack Obama.

A Reuters report yesterday quoted the presidential hopeful as saying he would ban all China-made toy imports following the safety scandals of this year, though admitting that such a move would cut off about 80 percent of toys in the United States. Calling for tougher inspections, Obama cited the example of Japanese food safety inspectors who go to China and meticulously test all food products sent from there.

Obama would probably be heartened by reports from China yesterday claiming the four-month national food safety campaign managed to hit its targets early, with a state newspaper reporting that officials seized 'thousands of tainted products and (put) many unregulated shops and eateries out of business... Inspectors shut 192,400 unlicensed food producers and pulled 29,800 products from the shelves.' 100% of stores in larger towns and cities, it was proclaimed, now had a quality label system in place and could trace back where their supplies came from.

And on the day after Thanksgiving, Xinhua reported yesterday, U.S. customers 'rushed in their hordes' to stores such as Toys 'R' Us to purchase Christmas gifts for their children. The article mentions Samantha Gusteins, a mother of one, who was carrying two big bags of toys and about to leave a store, saying "The toys are many and affordable."

No doubt she and many other shoppers would have Obama think twice about going to such extremes...      

The Central Economic Work Conference closed in Beijing on Wednesday with headlines proclaiming that the 'ten-year prudent' monetary policy will be replaced by the 'tight one' in 2008. The current 'prudent' policy itself replaced the 'proactive' policy in 2005. Amid familiar fears of 'overheating,' China's economy has been running at 11.5% year-on-year growth in the first nine months of 2007, and the annual consumer price index was estimated to stand at about 4.5%, overrunning the warning threshold by more than 1%. The conference identified five major problems in the national economy, starting with 'overheating' and inflation concerns, to a weak agricultural sector and difficulties with energy conservation and emission reduction, and ending with welfare issues.

So with the economy frequently showing signs of overheating, how long can China's phenomenal growth rates continue? Moreover, while low labour costs have undoubtedly been China's trump card in capturing world markets, how long can this advantage persist with labour costs likewise creeping upwards?

One study (see reference 1 below) conducted this year examining the impact of market access and internal migration on average provincial manufacturing wages in 29 Chinese provinces between 1997 and 2004 found that provincial wages increased by about 15% per year (or 130% over the 7 year period), corresponding to 'common shocks possibly like total factor productivity growth and national rise in prices.' Internal migration, the study found, has slowed down wage growth by only 2% per year.

The question is really how China can keep increasing the competitiveness of its products and maintain its export growth, and factors such as low wages, a favourable exchange rate and the flow of foreign direct investment have all played their part in fuelling China's growth. Yet according to a study (2) assessing the causes for China's competitiveness, China's pool of cheap and increasingly mobile labour means competitiveness based on low wages will persist for 'quite some time,'  and Chinese producers are becoming much more proficient in enforcing world requirements for quality and product design, partly facilitated by the inflow of foreign direct investment and entrepreneurship. In effect, the study suggested, with China's enormous rural population and increasing number of 'floating' urban workers, 'it will be many years before the supply of low-cost unskilled labour runs out.'   

(1) De Sousa, J; Poncet, S, How are wages set in Beijing?, CEPII, No. 2007 - 13.   

(2) Adams, FG; Gangnes, B; Shachmurove, Y; Why is China so competitive? Measuring and Explaining China's Competitiveness, 2006.

All Roads Lead to China recently emphasized the importance of logistical frameworks in facilitating trade and investment in China, citing as citing as further proof a World Bank report of early November (based on a world survey of international freight forwarders and express carriers) stating that trade logistics (the capacity to connect to international markets to ship goods) is critical for developing countries to improve their competitiveness in 'an increasingly integrated world'. In China, the posting concluded,

the logistics industry that has been set up for the export market is in many ways the most efficient system in place... Domestically though, China is still in a mess in many ways... but is improving.  

DHL Worldwide Express Inc. announced plans last week to invest $175 million on a new North Asia cargo hub at Shanghai's Pudong International Airport, and the CEO of DHL for Asia-Pacific was quoted as saying 'China remains the most important player in the global logistics chain in North Asia.' News reports last week (see China Daily's) also had China joining the 'world elite' in shipping, with the number of container units handled by mainland ports this year hitting the 100 million mark. Yet the China Daily article also quoted comments by Song Dexing, Director of the Chinese government's Water Transport Department, who claimed that China

is still a long way from meeting the growing demand of its rapidly expanding economy. The container industry must move away from traditional transportation and toward comprehensive logistics and service industries.

In fact, Logistics Management magazine identified China's underdeveloped transport infrastructure and immature logistics industry as a crucial challenge to the government's pursuit of a 'harmonious society.' Fragmented distribution systems, limited use of technology in the distribution and logistics sector, dearth of logistics talent, regulatory restrictions and local protectionism are all factors inhibiting the efficient distribution of domestic and imported products. Despite China's reputation as a low-cost country for business, selling in China remains expensive. Logistical costs are 40-50% higher in China than in the U.S., and by 2010 China will need an estimated 400,000 logistics professionals, while local universities struggle to produce even 10,000 logistics graduates a year. The logistics industry has at least begun to consolidate, which is gradually stiffening competition and lifting service standards. There are still over 18,000 registered logistics providers in China, however, and no single company commands more than 2% of the market.