It's time for China to heed global competitiveness reports

Doing Business

It's time for China to heed global competitiveness reports

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For many observers China’s economic development is a one-way bet. But like those who bet on the renminbi to only appreciate in value, a surprise is sometimes in store. 

On Thursday China slipped down the rankings of the World Competitiveness Yearbook. This influential report, produced by Swiss academic institute IMD, “analyzes and ranks the ability of nations to create and maintain an environment that sustains the competitiveness of enterprises.” In other words, it ranks how good countries are at creating prosperity from their resources.

The world’s second-largest economy fell to No. 23 out of 60 countries monitored, down two places from 2013 and its joint-lowest score since at least 2010, when it ranked No. 18. That puts it below nations such as Ireland and Malaysia – not exactly global economic giants.

While hardly a ringing endorsement of the Chinese business environment, it’s not really news. Foreign investors regularly complain of the difficulties in doing business in China. Policymakers in Beijing and local government tax collectors won’t be fretting about losing revenue.

First published in 1989, the yearbook is used by governments to figure out the standing of their country. IMD compares the competitiveness of nations in terms of economic performance, government efficiency, business efficiency and infrastructure. The ranking is based on over 300 criteria, two-thirds of which are based on statistical indicators and one-third on a survey.

IMD is one of three widely accepted global competiveness rankings published annually. The other two are the World Economic Forum’s Global Competitiveness Yearbook and the World Bank’s Ease of Doing Business Report. Each new release is pushed heavily in the media and governing politicians the world over use good reports to boast of their country’s successes.

So, they carry some weight. IMD attributed China’s decline this year partly to concerns about its business environment. A deeper probe into the report data mirrors some of the wider unease over the current standing of the Chinese economy and its attractiveness as a place to do business.

In the business efficiency category that looks at the extent to which firms are “performing in an innovative, profitable and responsible manner,” issues commonly flagged by businesspeople were prominent. China scored low for the role of large corporations, regulatory compliance and productivity. Shareholders’ rights and auditing and accounting practices fared poorly too.

A look at how government policy helps or hinders competitiveness also reflected long-standing problems. It takes longer to start a company and costs more to fire people and raise capital in China than in most other countries on the list. Unsurprisingly, the nation’s disastrous capital markets, poor treatment of foreign investors and tariff barriers were all cited as weaknesses.

Yet none of this is actually likely to impact on foreign investment in China. For many experts, it’s unclear to what extent investors consider such rankings when making investment decisions. That’s because a country’s competitiveness is typically less attractive for a company than its growth potential. Switzerland, Singapore and Hong Kong ranked second, third and fourth respectively yet they don’t excite people nearly as much as the China market does.

Foreign investors find the size of a country’s population and their higher consumer spending an important reason to park capital there. This does not necessarily factor into what most people would think of as being “competitiveness.” More than 50% of Swiss, European and American companies doing business on the mainland last year said China is a top three priority in their global investment plans, according to a survey by the Swiss Center Shanghai.

Between 2011 and 2015, China is projected to add more than US$5 trillion to its GDP, compared with US$4.7 trillion in the 2001-2010 period, according to Nicolas Musy, founder of China Integrated, a Shanghai-based consultancy. “In terms of business opportunities and in dollar terms, this means that China is growing on average twice as fast today as it did in the previous decade,” Musy wrote in an article for China Economic Review in April.

But despite China’s allure as a market officials should not simply ignore what the IMD yearbook has to say. Its economic growth is now well into single-digit territory and that impacts on the business environment. In a note released with the report, the China Institute for Development Planning at Tsinghua University in Beijing highlighted several key challenges for the country this year. Among those are cleaning up the environment, the need to stimulate domestic consumption, financial risks and the relationship between government and market.

The government of Xi Jinping is taking steps in the right direction on some of those issues. Measures have been put forward to roll back state involvement in the economy and open up protected sectors to private investment. Red tape has been cut for small businesses. Still, much remains to be done.

Global competitiveness reports such as the IMD Yearbook have gained influence at top levels. Whether that influence is deserved is the subject of fierce debate. A weak showing this year won’t hurt China’s attractiveness as a place to do business, but underlying and potentially damaging problems in the overall economy will eventually weaken its appeal unless fixed.