ASIA AND AFRICA: A GROWING NETWORK OF CHINESE FACTORIES

 

There is a very good reason for Chinese companies to create factories in Asia and Africa: lower wages.

The main ingredient behind the rise of industrial power in China, in the last thirty years, was the willingness of the average Chinese worker to toil for next to nothing. It gave China a labor cost advantage that helped it becoming the workshop of the world.

But then, things are in the process of changing, with slow, incremental increases in Chinese wages and with also the increasing economic pressure coming from countries with an even lower wage structure, like Vietnam, Bangladesh, Ethiopia, India, etc. All those countries are using against the Middle Kingdom the same recipe used by China to undercut the Western countries, a cheap labor force.

Nobody should be surprised, then, in such an environment, to see Chinese companies building industrial parks all over Asia and Africa, and filling them with rows of very-low-wages factories, usually linked to China through a network of railroads and/or ports. That process can be seen in Laos, Ethiopia, etc.

The system works for many reasons:

• host countries benefit with new jobs, new investments and new tax revenues,
• China benefits with a growing sphere of influence and a stronger national economy,
• Chinese companies benefit from having cheap labor producing low-cost articles that can be sold at a good profit, and
• workers benefit from factory jobs that don't pay much but are still far better than the farm jobs they would probably get otherwise in their own country.

Through all that, China can continue the transition from an industrial economy to a service economy, amid a demographic landscape based on a diminishing workforce and an age pyramid bulging toward an older population. The Chinese economy is transforming, and the proof of that is the growth of financial services of all kinds that has enabled Shanghai to replace Tokyo as the most important financial place in Asia. Beijing efforts to promote the Chinese yuan at the expense of the US dollar must be understood in that light. That currency is bound to become more visible, more useful, and more important in the future, as China's influence over the economic life of the entire Afro-Eurasian super-continent continues to grow.

The yuan won't replace the dollar as the most important currency this month or next month, of course, but it will likely progress a lot along that line in the next five or ten years.

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Text based on tweets published yesterday in reaction to some articles, including: https://asia.nikkei.com/Opinion/Belt-and-Road-s-next-chapter-will-be-all-about-the-yuan and https://asia.nikkei.com/Spotlight/Belt-and-Road/Thriving-on-China-s-Belt-and-Road-Laos-border-town-ditches-kip-for-yuan