A very thought-provoking post by Chris Devonshire-Ellis can be found on the China Briefing blog. A cool read, and almost designed to spark argument – hmm, not bad for a blog.

Anyway, I have a few comments, no surprise. Chris' post is divided into seven "China Myths" about economic development and growth here, which he says has stalled out in some ways. I agree with some of what he says and disagree with some, so I'll only re-post his stuff on which I want to comment (go read the original yourself for the whole thing).

China Myth # 1
It’s normal for the world to buy from China
It isn’t you know, and it’s changing. Cheap manufacturing has only been on the global agenda for the past 20 years, and only in the past 10-15 in any truly large quantities from China. Prior to this, China was closed – the dream of accessing the China market – now much considered to be a dream – has given way to the supply of cheap goods. But China has no inalienable right to this status. Other markets are emerging, with the U.S. preferring the logistical nearness of Brazil, and with other Asian tigers on the rise, China is facing pressures to adapt. Where we buy from in the next 15 years will not be demonstrated by a simple “Made in China” label.

OK, true, but who is saying that China will continue to dominate the low-end manufacturing sector forever? Most economists and trade analysts I read, not to mention the economic development crowd, talk these days about China moving up the value chain as did Japan, South Korea and Taiwan in the past. The Chinese government knows that costs are going up here, and if they do not start adding more value, there ain't gonna be much left after the low-cost stuff moves offshore. Moreover, the domestic market is starting to take off (see below), and there will continue to be advantages in domestic production for that reason for quite some time.

China Myth # 2
Chinese companies are making lots of money from the economic boom in the country
I also do not believe this. Global competition has meant many suppliers have wafer-thin margins to supply in admittedly huge quantities to global buyers. But the margins are being made by the middle men; those who buy from China on the cheap then get the product into the U.S. and European distribution channels. It’s global businesses who are making a killing on buying cheap Chinese product, not the Chinese manufacturers.

Sure, there are Chinese export shops that are getting squeezed. However, the market here is a lot more complex than that. One of the interesting trends recently cited by the World Bank's Q3 numbers is that a lot of the growth here is being driven by domestic consumption these days, not the export market. A lot of those domestic sales are being made by local manufacturers.

China myth # 4
Chinese businesses are going global
State endorsed strategic purchases of energy and mineral resources are one thing. But only Lenovo’s acquisition of IBM’s PC business represents the private sectors play in global M&As. A relatively paltry US$1 billion deal. Er…that’s it. Compare with just one of India’s deals – Mittal’s acquisition of Arcelor (US$36 billion). Yet everyone talks up China. The Chinese private sector is just not there.

I agree that the huge anticipated wave of M&A activity has not developed, but those predictions were a bit crazy to begin with. I think we have already seen a lot of leading activity on the trade front, where Chinese firms are beginning to roll up their distribution networks in the direction of overseas markets, much like the foreign investors did over here. That's going to account for a lot of investment even before you get to splashy M&As. Moreover, I expect some of the outward FDI to occur under the radar – after UNOCAL and now 3Com, it makes sense to keep some of these deals low key. We also need to wait and see what we get from the sovereign fund investments. Either way, it's hard to ignore all the news on this topic, which is out there almost on a daily basis. Tuesday's FT had this piece, while yesterday ICBC announced its overseas expansion activities, which includes a branch in the U.S.

China Myth # 7
China’s development has been an economic miracle

. . . So – with Beijing spending so much on brand spanking new infrastructure, and a pile of money on the Olympics, how are China’s rural population – 70 percent of the total – faring? Are they getting new roads, new schools, hospitals, and water? It seems perhaps not. Pollutants are increasing and riots are being commonplace nationally with unhappy peasant farmers seeing their lot get worse. The widening gap between rich and poor in China is now the widest globally. How sustainable is this before something starts to break down? . . .

I'm going to post on income inequality (PRC vs. U.S.) later today, so I won't get into that now. However, it's hard to argue against the economic miracle theme, just going by the numbers. Even if growth is very uneven and potentially unsustainable, that to me is merely an argument for certain corrective policies, some of which are being discussed this week in Beijing. It doesn't convince me that the general pro-growth economic agenda has been a failure, just that it could have been done better.

In general, Chris' analysis that China has hit a glass ceiling on development reflects, I think, the fact that we are at a point where the fast, relatively easy growth period may be over. All you have to do is go to Shenzhen and do a survey on local salaries, and you'll figure that out – China Economics Blog has a nice discussion of price creep and collapsing margins in the export sector. When you externalize environmental costs and don't worry about income equality, and when you have a gigantic market to attract FDI, you can leverage all that into some fantastic growth.

Getting to the next level of sustainable development will no doubt involve slower growth rates and probably some economic and social pain. The question is whether those difficulties represent an impenetrable barrier – I hope not.