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China’s Great Growth Sham

November 7th, 2007 · by Tim Minahan · 4 Comments · LCCS and trade, supply management, supply market dynamics, supply risk

Recent changes in government subsidies and environmental policies raise questions about the sustainability of China’s white-hot economic growth and could add costs to your China sourcing budget.

In a surprising move last week, Chinese officials landed a one-two punch on the country’s economic fundamentals, cutting energy subsidies and introducing tighter pollution controls. The moves increase costs for Chinese manufacturers and cut into the benefits for foreigners sourcing from the region. The policy changes also call into question the very foundation of China’s economics, suggesting that the country’s growth was partially fueled by government subsidies and unregulated business practices.

With rising fuel shortages, the Chinese government has reduced fuel subsidies, resulting in an overnight 10% boost in gasoline and diesel prices for both manufacturers and consumers in the region. A Wall Street Journal article last week suggested that the decision to boost fuel prices was a reaction to diesel shortages throughout China.

The move is expected to rein in demand and global fuel prices over the long haul. However, economist anticipate the policy move could initially spark a boom in demand for crude oil as Chinese refineries look to make more gasoline to reduce shortages.

In a separate move China’s Ministry of Commerce introduced stringent antipollution regulations that aim to cut manufacturing plant emissions and pollutants. The new policies also carry some serious bite: manufacturers violating the rules would be forced to close for a period of one to three years.

The change in environmental rules is part of China’s ongoing effort to curb pollution due to exports. For example, earlier this year, the government encouraged banks to only provide loans to businesses that pass environmental assessments.

The change in environmental policy is for good reason: a study in the Journal of Environmental Science and Technology found that 89% of the sulfur dioxide pollutants in the Shenzhen manufacturing province are released in the process manufacturing goods for export. 

Yet, despite its good intentions, it is clear that the new policy will increase costs for multinationals sourcing from Chinese suppliers. Not to mention, it will require supply managers to increase their diligence when assessing the environmental compliance of suppliers in the region.

China’s recent about face on fuel subsidies and environmental rules reveal that the region’s growth was in part fueled by the government as opposed to solid business fundamentals and efficient manufacturing practices. This is an argument that even Chinese officials admit. According to a separate Wall Street Journal article last week, “The ministry said the prices of Chinese exports are artificially low because factories aren’t paying for the costs associated with pollution.”

Unfortunately, supply managers will be forced to pick up the tab as China comes to terms with its new free market policies. However, curtailing government subsidies and instilling environmental accountability should actually have long term benefits for global sourcing. The new rules will force Chinese manufacturers to adopt more efficient equipment, manufacturing, and supply chain methods. This will result in more sustainable economic growth and supplier performance in the region. 

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4 responses so far ↓

  • 1 Jordan Sampietro // Nov 13, 2007 at 10:52 pm

    Despite it’s sensationalistic headline, this article effectively points out that China’s low cost goods are a short-term phenom.

    In additional to China’s additional fuel costs and move towards better environmental stewardship, other short/medium term inflationary pressures also include possible upward yuan exchange rate reset, and intense suppression of wage inflation.

    ..then of course there’s all the skyrocketing commodity input prices for all that Chinese merchandise.

    2008 looks like an Inflation Party! Ugghh.

  • 2 Tim Minahan // Nov 14, 2007 at 9:12 am

    Unfortunately, I think you’re right. The only positive is that, history has shown, that in times of financial crisis, CEOs and CFOs turn to purchasing for help. The next few years of global uncertainty will provide a window of opportunity for supply management professionals to step up and showcase their talents and demonstrate how you can drive the strategic objectives of the company.

  • 3 Jordan Sampietro // Nov 18, 2007 at 11:54 pm

    Good points. Consider this..

    Is it irresponsible of procurement & supply professionals to capitalize on a “crisis” when we saw the the train coming well in advance?

    Don’t we serve our organizations better by taking steps to prepare for and mitigate global supply risks, that might prevent the organization from meeting it’s strategic goals?

    How many purchasing execs have the guts to report the truth to their CEO & CFO, COOs that the cost structure in 2008 will be rising siginificantly (from all sides), and start talking “cost management” rather than cost savings?

  • 4 Supply Excellence » China Makes Good on its Green Promise // Dec 26, 2007 at 11:19 am

    [...] Earlier this year, I noted China’s plan to embrace sustainable business practices. A recent Wall Street Journal article shows signs that country leadership is making good on its green promise. [...]

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