Business guru warns of impact of China's 'market integration'

China's policy of earmarking some parts of its production system specifically for exports has been seen as the main reason behind the country's incredibly rapid economic growth.

However, the division in the production system had also resulted in domestic consumers being deprived of goods destined for export, to the point where, in some cases, they had to be reimported in order to be sold to the general public.

However, according to renowned business guru Victor K. Fung, this situation is slowly changing as Beijing aims to integrate the two parts of its production system.

"Once the government frees up production for export, Chinese consumers will see an abundance of goods, which will lead to a tremendous increase in consumption and, in turn, rebalance the economy towards a consumption-driven one rather than an investment-driven one,"

Fung was delivering the Panglaykim 2007 memorial lecture Tuesday. The annual lecture is sponsored by the Prasetiya Mulya business school and the Panglaykim foundation.

Fung, who is also the chairman of Li & Fung Group, warned that the integration of the previously "separated worlds" would likely have an impact on other developing countries, including Indonesia.

Also speaking during the memorial lecture, Trade Minister Mari Elka Pangestu acknowledged the threat, saying that such integration would further increase China's already huge production capacity.

"China applies an export rebate policy, which basically allows most export duties to be rebated to exporters. This is its way of providing incentives. There are also regulations that require certain companies to focus only on exports," she said.

"Nowadays, China is beginning to eliminate this market-focus separation by, among others things, cutting the export rebate from the previous 17 percent. It will eventually be eliminated completely."

"This will likely increase the competition for us," she said.

Still, Fung argued that there was still plenty of space for emerging countries to benefit from this globalized production network.

For Indonesia to leverage its advantages, he said the government must adopt a more specialized approach and look for the niches in the global supply chain where the most value could be added.

He stressed that in order to minimize costs and create the best value for money, information technology infrastructure and efficient logistics were the two key ingredients.

As the world "flattens" more, coordination with partners around the globe had become even more crucial in the system of dispersed manufacturing.

As the global production network continuously demanded faster means of delivering of goods, attention to logistics infrastructure was of the utmost important. He predicted that the delivery of goods by air would become the norm in the future.

"I happen to be the chairman of Hong Kong airport, which is the busiest cargo airport in the world. From that standpoint, about 34 percent of Hong Kong's total trade is moved by air," he remarked.