China's place in the new East

Linking together the disparate countries and cultures of ‘the East’ can seem something of an anachronism nowadays, but in his new book The Rise of the New East Ben Simpfendorfer combines the birds-eye view of an economist with on-the-ground observations to join the dots for the reader.

It makes sense to talk about the East rather than Asia, Simpfendorfer argues, because for example, India’s ties to Kuwait, Saudi Arabia and the United Arab Emirates are far stronger than those to China, Hong Kong or Thailand.

But while the scale of the market is certainly impressive, it is broken up into more than 50 countries, each with different cultures and conditions. What sells in Jakarta, Simpfendorfer argues, won’t necessarily sell in Beijing.

At the centre of this complex web of commercial activity and increasing trade flows is a single focal point -- China.

The middle kingdom accounts for almost half of the East’s total economic output, exerting the greatest gravitational pull on the rest of the region and is therefore also central to its challenges.

According to Simpfendorfer’s estimates, there are 400 million households in the East earning $US15,000 per year, adjusted for purchasing-power parity. Half of those are in China.
 
China’s vast population of middle class consumers is spread most widely. There are 143 cities in China with a population of more than 750,000 compared with just 15 in Indonesia, making it ‘a blueprint for complexity’.

China looms large due to its massive size. The population of a single city in China can surpass the population of entire countries in the rest of the region.

Further complicating the picture is the increasing spread of middle class consumers across the country. China has more affluent consumers spread across more cities than any country in the world.
 
According to Simpfendorfer, foreign businesses seeking to get a share of that action should follow the example of the biggest domestic retail and restaurant chains that focus on certain regions.
 
Local apparel chain Peacebird has 922 stores in over 150 cities, but nearly a quarter of those are in Zhejiang province and another quarter in neighbouring provinces.
 
The old game of focusing on large first-tier cities like Beijing, Shanghai and Guangzhou has long gone as household purchasing power increases in cities further inland and throughout the country.
 
Further adding to the complexity is China’s booming e-commerce industry. The average Chinese person has three to five smart devices compared to one or two for the average American.
 
Smartphone penetration rates are so high for much of the region because mobile technologies were developed in place of landline services.
 
Similarly, shopping malls that dot the landscape of Western countries may never be built in a country with rapidly advancing e-commerce and logistics industries.

China’s rising wage costs are now reshaping global manufacturing chains. Countries such as Bangladesh and Vietnam may have lower labour costs, but that doesn’t mean foreign companies should retreat from China. After all, the author argues, why would you leave your fastest-growing market?
 
As a result of these changes, sourcing companies have adopted a “China 1” strategy, where companies source from China and at least one other country.

Simpfendorfer believes China’s commercial engagement with the rest of the world is evolving in much the same way its own economy is.
 
The gravitational pull of China’s rapidly expanding consumer market is so great that even as the economy slows, private Chinese companies are looking overseas for brands and technologies to bring home.

He predicts the largest state-owned firms will continue to pose a serious challenge to foreign multinationals while smaller state-owned firms will retreat to their home market.
 
But the most exciting development will be to see if China’s private firms are able to wrestle some opportunities away from the state sector.
 
Ultimately, the new East is fundamentally different to the old East. It’s not just a cheap place to produce goods, it’s also a place to sell goods.
 
And at the centre of this resurgent region is China. Even as its economy slows and wages increase, China’s sheer size means there’s no substitute waiting in the wings.
 
China is simply too big to replace.

The Rise of the New East

By Ben Simpfendorfer

Palgrave McMillan, 240pp, $26.00