Analysis: Investors make $100 billion bet on China's drive up value chain

Tue Nov 20, 2012 6:05pm EST
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By Kevin Yao

BEIJING (Reuters) - China's soaring wages and strengthening currency might blunt the competitive edge of exporters that have seen average pay double since 2007, but it won't stop firms worldwide making a collective $100 billion bet on setting up shop here this year.

Although foreign direct investment inflows in 2012 have seen the longest monthly run of year-on-year declines since 2009, hurt by a weak outlook for corporate investment and sagging global trade, FDI should still top $100 billion for the third year running.

That would bring China's total since 2007 to about $625 billion, based on data from United Nations agency, UNCTAD, during which time a rally in the yuan currency has sliced 25 percent from exporters' margins.

Vietnam, Bangladesh, Indonesia and Thailand combined managed to snag only $141.6 billion in FDI between them from 2007 to 2011, despite being repeatedly touted as the places to which manufacturers fleeing China flock.

What keeps the money coming to China is a steady shift away from cheap assembly lines to high value-added production and from volatile external demand to the spending power of a new mainstream consumer class that analysts at McKinsey reckon will rise 10-fold between 2010 and 2020.

Indeed the decline of low-end manufacturing fits with Beijing's ambition to drive firms up the global value chain to help sustain the wage rises vital to attaining developed economy status and avoiding a "middle income trap" of low wages and stagnating growth.

"It's so far not threatening to the competitiveness position of China because it's the very low-end of manufacturing sectors that are affected," Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong, told Reuters.

"In that sense, it's quite consistent with the government's strategy to move up the value chain and improve the industrial structure," said Kuijs, a former World Bank economist in China.   Continued...

An employee carries a box at a workstation during an operational test of the new DHL North Asia Hub in Shanghai in this July 12, 2012 file photo. REUTERS/Carlos Barria/Files