China 2008: What lies ahead - Part 1 of 3

Written by || January 17 2008

Year 4706, the year of the rat, begins on February 7th in China this year. With the celebration just under a month away, it’s tempting to use the time to procrastinate on making predictions on what will happen in China is 2008 as it’s technically not the new year here yet, but unfortunately, China doesn’t wait.

So over the next couple entries we’ll take a look at what lies ahead for China in 2008. In this entry we’ll take a look at some of the macroeconomic and social factors and then in the next we’ll take a look at sthe stock market, the Beijing Olympics, and finally, what all this means for tech companies.

Starting Fast

Two weeks into the year and already there are a number of important initiatives in play, not least of which is the unified corporate income tax law which recently took effect. The law sets a unified income tax rate for domestic and foreign companies at 25 percent. This came after years of criticism that the original dual income tax mechanism, intended to attract foreign investment, was unfair to domestic enterprises. Now attracting FDI (Foreign Direct Investment) certainly isn't a problem for China, but how to control it is.

The Price of a Pig

Looking further into 2008, the key economic agenda item for the government this year is to keep the economy from overheating and to control inflation. China’s GDP over the past five years has grown by more than 10% annually. While the growth has been a boon for Chinese enterprises, it has also fuelled inflation. The consumer price index (CPI) grew by 6.9% in November, the highest in nearly 10 years. Higher food prices, including those of pork, China’s staple meat, have affected consumers’ spending greatly and will continue to cause uneasiness unless inflation can be brought under control.

These issues will drive government policy through 2008 and likely into 2009 and will likely include continued monetary tightening to keep economic growth on a socially and environmentally sustainable trajectory. The government is all too aware of the risks of not keeping economics in order. 2008 will mark the 30th anniversary of the reform and opening up at the Third Plenary Session of the 11th CPC Central Committee held in Beijing in 1978. Since China adopted the open door economic policy there have been three major spikes in inflation (1978-79, 1988-89 and 1994-1995) each of which resulted in major social instability and eventually led to top leadership changes.

The Yuan

The Yuan exchange rate has crossed an number of important psychological barriers in the past few weeks, the latest being 7.25 Yuan/USD, which occurred a few days ago. There’ is no lack of predictions of where the Yuan will end up with respect to the dollar, but it’s safe to assume that by the end of the year, this will have shifted another 10-15% which is somewhat in response to complaints from US lawmakers that China is harbouring an undervalued currency, but more importantly, it's a way for China to cool the economy through more expensive exports.

Social Mores

Politically, with the Olympics on the horizon, China will be under intense scrutiny for their social and human rights policies. Although some international protest will be inevitable whatever the government decides to do, it is a focus for the Party in 2008 to ‘promote social justice and harmony.’

An early example of this is the labor contract law, which took effect already this year as well. Officially, it entitles employees who have at least 10 years’ service in one company to sign contracts that protect them from dismissal without cause. It also requires employers to contribute to employees’ social security accounts and set wage standards for probation and overtime. Unofficially, it makes labor laws much more stringent making it harder to hire and fire (read: more European).

The labor contract law is of course popular with the average worker in China and although it hinders business somewhat, it also helps keep the populace satisfied and 'harmonious.'


Tomorrow: the stock market, the olympics and what it all means for fintech.