Slowdown reflects rebalance

GaveKal-Dragonomics, an independent research and advisory firm specializing in China's economy, explains China's growth this way: "As it has modernized its economy, China has experienced a virtual 'tsunami' of labor. Much of this has consisted of young Chinese women between 18 and 22, with not much bargaining power. As a result, China, for a long time could run its economy at double digit rates of growth, with little pressure on wage and price inflation or the exchange rate."

This was not surprising given that after reform and opening-up a seemingly endless supply of unskilled migrants from rural areas flocked to the big cities and the new industrial zones in search of a factory job that promised a better future than farming.

However, China's demographic dividend is coming to an end and the tightening labor market means the authorities will in all likelihood have to consider a higher exchange rate or higher inflation, as China shifts from its reliance on export-led development to consumption-led growth.

With this in mind should we be concerned about China's slowing economy?

The recent data from Beijing may have given the markets some jitters but there are long-term trends that explain some of the slowdown in China.

First, the stimulus that did so much to boost China's economy at the onset of the global financial crisis has now lost its impetus. These were the famous "bamboo shoots" that China provided to the region, which assisted other Asian economies and key suppliers of resources to China, namely Australia and Brazil, but also to some extent Canada and South Africa.

Second, the eurozone crisis has had an adverse impact on China's fortunes. In terms of manufacturing in key areas of Chinese comparative advantage like textiles, clothing and footwear, Europe has surpassed the United States as China's main export market so when they are feeling the pinch in Athens, Milan and Paris it affects companies in Beijing, Guangzhou and Shenzhen.

Third, even without the "eurosclerosis" we are experienced this year, China's trade patterns were not going to continue at the same cracking pace. The subprime meltdown in the United States and Lehman Brothers collapse were a big external shock to China's economy, which had been enjoying an annual average export growth rate of 27 percent after joining the World Trade Organization.

In fact, even without the global financial crisis or the Greek sovereign debt crisis, China's trade patterns reflect the re-balancing of the global economy. Even before Lehman Brothers collapsed the world knew that the US had too many shoppers and not enough shippers, while China had too many shippers and not enough shoppers.

As a result the US has had to readjust its consumption, become more competitive and reduce its over-reliance on debt; and China has had to reduce its over-reliance on export-led growth and increase domestic consumption and the efficiency of its investment. The center of global economic gravity is shifting from the rich G8 nations to the emerging world and China is fundamental to this historic structural change. You can see it not only in terms of China's domestic shift away from export-led development but also globally as China is increasingly becoming involved in outward foreign direct investment.

But what does China's slowing mean for Asia?

First of all, Tokyo is trying to move key parts of the Asian global supply chain out of Japan, and China along with the ASEAN economies are playing a key role in the re-globalizing of Japanese industry. A slow but stable China will allow this process to continue. Second, China's slowing will take some of the US pressure off the renminbi's exchange rate and allow the global re-alignment to take place more systematically. Third, even with a slower rate of growth in China, countries like Australia and other resources suppliers such as Brazil and even Canada and South Africa will continue to benefit by meeting the construction needs of the second and third tier cities that are blossoming in China's western and inner regions.

Even more importantly, agricultural techniques, agribusiness services and management practices from Australia, Brazil and other trading partners, will be important service exports to China as the local population lifts capacity and technological change in its own farm sector.

On my most recent trip to China I visited a factory in Shenzhen as part of the University of New South Wales' Australian Graduate School of Management international business strategy course. At the site, the owner complained that he couldn't keep workers at the factory, because they kept leaving for comfortable office jobs offering the same wages. As a result the owner had to offer piece rates, where the more goods (in this case watch bands) they assembled, the bigger the bonus they received. This demand for labor has created something of a mini workers' paradise in the region.

China's economy and its labor market are changing and the economic slowdown reflects this.

The author is the JW Nevile Fellow in Economics, Australian School of Business, The University of New South Wales in Sydney and author of The Airport Economist.

(China Daily 03/21/2012 page9)