Chinese growth bubble to burst! Is it for real?

By Indranil Sen Gupta, Financial, Economic Writer and Research Analyst

CHINA is widely seen as a saviour of the global economy. But, paradoxically, many international experts also feel that it is a bubble which may burst sooner or later and would hurt the global economy very seriously. But if we go by the latest statistics it may appear that China is internally very strong. Let's take a look at some of the recent highlights:

++ According to data recently issued by the American Chamber of Commerce in China (AmCham-China), 71 percent of U.S.-funded enterprises in China generated profits in 2009. Around 76 percent of them have had higher profit margins than their average global profits.

++ But due to the global turmoil of 2008 there have been quite significant drop in the investments in china by overseas routes.

++ According to a report issued on Jan. 19 by the United Nations Conference on Trade and Development (UNCTAD), the foreign direct investments (FDI) around the world tumbled by nearly 39 percent in 2009. Of which, FDI was down over 41 percent in developed countries and about 35 percent in developing countries.

++ In 2009, FDI in China dropped only less than 3 percent. Since August 2009, foreign investments in China have maintained a continued, positive growth.

++ Investments in China plummeted not only due to the global turmoil but due to china's economic policies. But now we are witnessing some problems from china regarding the overseas investments.

++ Currently Chinese regulations of foreign investments are damaging the investment growth in chain and due to this foreign enterprise is facing lot of problems.

But china is backing up again and is very much active on the ladder on drawing attention of foreign investments. The most important reasons behind the high profitability growth of investment through FDI route followed with the investment confidence among foreign enterprises lie in the fact that China is constantly rolling the wheels of improvements in China's investment environment and the lowered transaction costs for foreign investments.

China enjoys the factors of cost competitiveness in areas like as labor, resources, land and environment. In a very recent note by The State Council clearly stated that in the "Several Opinions on Better Utilization of Foreign Investments" issued on April 6 that China will expand the areas that are opened to foreign investments, optimize the industry and regional foreign investment structure and enhance the investment and management efficiency in order to foster a sound investment environment. It clearly point outs that china will surpass and design policies to break all the figures of its past FDI investments in china.

When china opened up the doors of foreign investments till then and now the government have changed and reformed the polices almost more than 5 times. But their have been certain problems regarding value of customs and ethics of china. Respecting China's laws, customs and culture is the most basic business ethic for foreign enterprises and this part is often gets some small tremors which disrupts the chinese state ethics. Apart from the investments, china is improving the manpower quality and research & development is also happening at rocket speed so as to meet the rising the demand of professionals. We only read of Chinese infrastructure, telecom and other sectors super growth but do we read about that the quality of manpower and professionals required to support the economic growth of china. Moreover to roll over the wheel of development in any economy research and development plays one of the most momentous characters.

If we look into the potential of the Chinese youth and the level of experience we find that

++ China has nearly 1.6 million young engineers (those with seven years of experience or less), which is a tremendous advantage in its drive to make a transition from a labor-intensive economy to one based on high technology.

++ China currently spends 1.5 percent of its GDP on research and development versus 2.7 percent spent by the United States. While this is more than any other developing nation, it still falls short of being adequate to ensure future competitiveness in high-tech fields.

++ More and more foreign enterprises are establishing R&D centers in China to take advantage of cheap Chinese engineers. They can pay on 700 U.S. dollars a month on average for a Chinese engineer, which means they can hire four to five engineers for the price of one American.

++ This cheap valuation of chinese manpower have also compelled the citizens to leave china and work in other nations.

++ Now china is working hard to bring those talent back in to their country. China has introduced a number of policies designed to reverse "brain drain and bring back the talents to their own country.

It seems that this resource is not being utilized enough by China. One way to make better use of China's youth would be to increase government spending on research and development, creating more high-tech jobs. Statistics show that nearly 60 percent of young Chinese engineers have difficulty finding jobs after graduation.

China is looking in all respects to make its economy beyond the word of super power. When other nations are busy in collecting its fragmented economic health China is setting up the wheel of development for the coming decades. China is looking into the core areas of economic growth and not building an artificial economic growth based on reckless lending and speculative dreams.