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Be Confident and Patient – An Analysis of China’s Economic Situation in the Third Quarter of 2017

July 11, 2017
Cheng Hong

To better the understanding of macro-economic situation and analyze the economic situation in the third quarter of 2017, the faculty and students of the Institute of Quality Development Strategy made an interview and survey on 1208 enterprises for China Employer-Employee Survey research in June. The survey shows that we have confidence about the economic situation in the third quarter, but we also need to be patient about the future economic development.

  

 The reason why we have confidence lies in the fact that the enterprises are experiencing many satisfactory changes. A considerable number of enterprises are actively involved in economic transformation and accumulation of innovation driving forces. They have paid more attention to the management and quality, continuously improved the total factor productivity, and made efforts to change the development model.

          

At the same time, we should be more patient. First, firms are still highly dependent on the traditional development model. To decrease the reliance on factor growth is still difficult within a short period; Second, the constraints of labor cost are more powerful than we have imagined; Moreover, the stringent environmental regulations poses a new challenge to the firms in these years.

Specifically, our confidence about China’s economy in the third quarter of 2017 mainly comes from the following two aspects.

  

On the one hand, firms are making efforts to input driving forces of economic transformation and upgrading. According to CEES research, we found that a considerable number of enterprises were actively transforming and upgrading themselves during the economic slowdown. The numbers of enterprises negatively waiting were decreasing while more companies chose to positively make changes. Some of the original equipment manufacturers targeted at domestic markets from foreign markets and changed OEM products to self-owned brands; Some labor-intensive enterprises accelerated the investment in robots and other automation equipment in response to rising labor costs; Some enterprises withdrew from the manufacturing industry to the service industry while some actively used the big data resources on the internet. They explored the market demand for more accurate transformation and upgrading. For example, a medium-sized baby carriage company invested millions of yuan to set up a data analysis department so as to accurately predict the market demand. Those efforts made by the firms to promote transformation and upgrading will inject potential driving forces for future economic growth.

   

On the other hand, companies increasingly focused on improving performance through management and quality improvement. In terms of company management, many firms enhance their management capacity through acquisitions, reorganization and equity diversification. Some OEM businesses take the initiative to merge with brand enterprises of a certain market competitiveness. In addition, the wage incentive system is also changing. Performance-based pay system is more common. These changes, to a large extent, enhance the management level of enterprises, in particular, the management capacity of SMEs. From the perspective of quality, firms pay more attention to the development of personalized products and individual needs; They lay greater emphasis on improving workers’ skills so as to reduce product failure rate, thereby improving resource utilization; There are some companies trying to find new development path through development of new products.


Therefore, we need to have patience about economic growth in the third quarter, mainly because that enterprises will face with short term difficulties during the economic transformation and upgrading.    


First, many firms are struggling to get rid of the reliance on traditional growth patterns. According to the CEES research, it is not difficult to create a new development notion. The most difficult problem is that enterprises lack of development capabilities through innovation. Innovative growth is a systematic and ecological project including entrepreneurial spirit, development strategy, governance structure, organizational structure, process change, human capital, technological innovation, marketing channels and quality brands, which are difficult for many enterprises. The overall assessment of these sample firms shows that the performance of one-third firms is declining, and about half of those firms which achieve performance improvement are still dependent on investment instead of innovation. 

    

Second, labor costs are rising and recruitment difficulties are still increasing. CEES research found that the rapid rise in labor costs did not disappeared, but intensified, bringing downward pressure on the firms’ performance. According to preliminary estimate, the average wage cost of employees is about 10% higher than that in 2016. The trend of rising wages is not only common in the eastern region, but also common in the central region. At the same time, entrepreneurs said that it was difficult for firms to recruit workers paid with acceptable wages. This phenomenon is more obvious in the coastal areas while labor forces going back to the mainland has become the norm. In order to retain workers, many companies continue to increase various welfare expenses (such as improving working conditions, providing staff accommodation, improving social security, etc.), resulting in increasingly growing labor costs. In the central region, although the first-line workers are relatively stable, the shortage of skilled workers is serious. Many companies expressed that lacking of skilled workers has become one of the main shortcomings in the process of transformation and development. Overall, faced with rising labor costs, the company as a whole still did not find an effective response. Labor productivity growth is still unable to catch up with the rise in labor wages.

   

Third, the rapid rise of raw material costs posed great pressure on the enterprises. Sample enterprises generally conveyed that the strengthening of environmental protection and safety regulations led to the enterprises withdrawing from the upper reaches. Thus the monopoly contributed to the sharp increase of raw material costs. Obviously the strict environmental regulation policy makes a large number of enterprises withdrawn from the market, leading to intensifying monopoly of some upstream industry. In addition, the reduction in upstream supply has also brought about increasing costs which are difficult for the firms to bear.

   

All in all, CEES research focusing on front-line enterprises has shown that our China's economy will continue to wander in the third quarter of 2017. In this process, companies are actively adapting to changes of rising labor costs and the inputting innovation driving forces, where our confidence rely on. However, we need to have patience, because the transition will not be achieved overnight. It is difficult to estimate when the short-term factor development model will be changed into development model driven by innovation. Therefore, 6.7% -6.8% of GDP growth will continue while the economic reversal is unlikely to happen.

   

In fact, confidence and patience are two sides of the same coin. On one hand, we need to have confidence and be able to bear loneliness so as to gain more confidence; On the other, we have to be more patient to see the positive facts in transition. The theory of speed victory and failure has no basis. What China's entrepreneurs need most is a patient mind. As long as they make efforts to accumulate the momentum of transformation, I believe China's economic growth driven by innovation will be achieved in the future.