Major Components to Price Reductions by the Chinese Manufacturing Sector, 2005

Major Components to Price Reductions by the Chinese Manufacturing Sector 2005

Source: Navarro, P. (2006) Report of “The China Price Project”, Merage School of Business, University of California-Irvine.

Among manufacturers, the “China Price” came to be known as a frame of reference which can in many cases be 50% lower than other competitors. Although lower wages in China are an important factor behind lower prices, accounting for close to 40% of the price reductions, other factors, many of which being perceived as unfair trading practices, are at play. A whole range of export subsidies is provided, including subsidized energy, raw materials, and land, but also tax exemptions and loans (for state enterprises) that “do not need to be repaid”. Industrial clusters, particularly in the toy and apparel industries, have emerged, conferring net productivity advantages by having related activities located nearby. This was particularly the case for the Pearl River Delta where manufacturers are nearby each other and close to large international port terminals such as Hong Kong and Shenzhen.

China was also maintaining its currency close to being pegged to the US dollar and under normal circumstances (due to its very positive trade balance with the United States), its relative value should be substantially higher. Counterfeiting and piracy were also rampant, for which many manufacturers were not paying royalties and license fees for products designed elsewhere. Foreign Direct Investments (FDI) has also played a catalytic role in terms of financing the transfer of advanced production technologies, managerial practices, marketing, and distribution strategies. Lax health, safety, and environmental regulation were contributing factors. However, the factors that played to China’s advantage, namely wages, became less relevant in light of the significant wage inflation that took place in the late 2000s. From the 2010s, the competitiveness of the Chinese manufacturing sector, as far as low labor costs are concerned, was being challenged.