china_manufacturing.jpgAlthough it might seem counter-intuitive, China's manufacturing sector has emerged strengthened by the recent turmoil in global financial markets and the PRC is moving up fast on the services front as well.

That is the conclusion of a recent report from PricewaterhouseCoopers on the relative attractiveness of emerging markets for investment by UK businesses.

China's manufacturing sector has shot up from 14th position in PwC's index in 2008 to become the fourth most attractive destination in 2009, beaten only by Malaysia, Chile and Bulgaria, which are all much smaller economies.

Of the four big “BRIC” emerging economies — Brazil, China, Russian and India — China was the only one to improve its position.

As was the case with Chile, Malaysia and Poland, the upward movement has been largely driven by the fact that China's country risk premium has risen by less than that of most other emerging markets, which have seen their risk premium increase — in some cases significantly — because of the turmoil in global financial markets.

Vietnam, which is sometimes painted as the “next China” for manufacturing, saw its position worsen considerably because of a higher risk premium due to its heavy reliance on FDI and international sources of lending.

Because of last year's financial turmoil, PwC has changed the methodology used to compile risk premia to give much greater weight to the fundamentals that affect country risk and not just look at sovereign debt data.

The net result has been to favour “safer” countries like Chile and Poland even though they have relatively high GDP per capita figures. Under the previous methodology, this would have counted against them because higher GDP is conventionally associated with higher labour costs and so reduced manufacturing competitiveness.

That change could also favour China where per capita GDP and labour costs are expected to inexorably rise in the longer term as the economy matures.

Some economists argue that rising labour costs could seriously jeopardise China's export-driven manufacturing model because foreign investors will seek out cheaper locations.

But the PwC report suggests that in an uncertain world, China's relative stability may offset any labour cost disadvantage.

PwC also compiles an index for services companies looking to invest in emerging markets.

The most visible advances in the PwC services index have been made by Slovakia, China and India. Slovakia and China, which now occupy first and seventh place respectively, have both seen their country risk premia fall relative to many other emerging markets. Unlike smaller emerging markets, India's relative economic and political stability has helped improve its position.

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