As Beijing celebrated the start of its 'Olympic Year' with a large outdoor music performance on Monday night, we might well look at some of the trends that could impact China sourcing in 2008.

Homeworldbusiness speaks of "shifts in the China sourcing paradigm" as a 'macro' issue of 2007, and one which is expected to escalate in 2008. As a gloomy forecast of the outlook for the U.S. housewares industry in 2008, changes in the Chinese economy in the coming year like 

Inflated prices on Chinese-made housewares induced by rising raw material and fuel costs are a reality that the biggest retailers can no longer deny. Get ready for mounting increases in 2008 stoked by a weaker dollar to the Yuan RMB, reduced export tax rebates to Chinese factories, stiff pollution penalties and tightened product safety standards as the Chinese government adopts and enforces regulatory controls.

The benefits of stricter product safety standards, however, should be more evident in 2008, even though housewares retailers and suppliers will have to "rigorously self-police" to ensure the quality and safety of all their products. And as an additional challenge to Chinese sourcing in 2008, the Olympics may lead to labour shortages as workers are temporarily relocated to Beijing, resulting in restricted production during the usually critical June/July manufacturing period.

For Supply&Demand-Chain Executive the advent of the Olympics could in 2008 coincide with media attention focusing on China as the world's next potential 'bubble,' leading many manufacturers to shift sourcing strategies away from Asia. The falling dollar, limited free trade agreements, high energy costs and rising production costs will all contribute to companies reevaluating extended supply chains in Asia, and in addition

shareholders and board members could question their company's reliance on China and the Asia region should any further negative headlines arise regarding quality issues or if China receives bad press on the handling of protestors and dissidents prior the the Olympics. 

Prospects for 2008 have a few few commentators fearing signs of 'bubble(s).' The Washington Post on Sunday outlined China's current dot-com boom where start-ups have proliferated in the past decade in 'new Silicon Valley' districts thanks to an aggressive government campaign to attract private investment. Since the beginning of a frenzy of investment in 2005, many domestic Chinese companies that have gone public have traded at exceedingly high valuations, and some fund managers are worried that China is creating a tech bubble similar to the one that burst in the United States at the start of the decade.

Yet the party seems far from over in China, and Moneymorning.com views China as being on the edge of an economic transformation known as 'global decoupling' in which the growing prosperity and influence of China is contributing to the U.S. slowly being excised from its role as global economic trendsetter, all indications that 2008 will see a continuation of trends prevalent in 2007.  

Note: This posting is an abridged version of an article by Julian Hewitt which originally appeared on The Beijing Axis website. The full verison of the article can be accessed here.

Two and a half decades of economic reform have placed China firmly on the path of rapid industrialization. China’s recent ascension to the World Trade Organisation has further hastened its opening up to the rest of the world.

At the same time, South Africa has also enjoyed a fruitful period of economic and political progress after many years of international isolation. However, it was only since the establishment of formal diplomatic ties in 1998 that these two regional leaders have begun to realize a significant growth in trade.

In 2006 China exported USD6.6 billion worth of goods (dominated by electronic equipment and textiles) to South Africa while it imported USD2.0 billion worth of goods (dominated by raw materials) from South Africa, according to South African Revenue Service figures. Official statistics from the Chinese Statistical Bureau paint a rosier picture, however, with Chinese exports to South Africa standing at USD5.8 billion and imports from Africa’s largest economy at USD4.1 billion.

China’s rapidly growing middle class is opening up new exporting markets for South African suppliers, and from a South African perspective, rising Chinese living standards are translating directly into more wines, fruit juices and fruit on local supermarket shelves. In addition, China is also becoming a focal point of international gold, diamonds and platinum sales, and on an industrial level South Africa is a large supplier of raw materials that help fuel China’s factory-floor economic model.

China presents big importing prospects for South African suppliers and retailers, yet sourcing of products from Chinese suppliers and maximizing China’s strength as a producer of the lowest cost goods is an avenue South African firms have not yet fully tapped into. Of course, trading with China is not without its pitfalls, even for companies with previous Chinese experience. Language and cultural barriers and often opaque importing and exporting processes serve to complicate business interactions and frustrate expectations between buyers and sellers. China is also a very regionally fragmented market, and this often requires specialized local knowledge of how to tap into potential Chinese business opportunities.

However, it is not without just cause the China commands daily media attention. The benefits of incorporating a China objective into your business’ importing or exporting plan far outweigh challenges on the way. China represents a competitive advantage and it not taken up, could easily be to your competitors advantage.

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.