The rise (and rise?) of China – part two

To read part one of 'The rise (and rise?) of China', click here

In 2013 America's largest retailer, Walmart, launched its 'Made in the USA' campaign under pressure from unions. With a goal to buy US$250 billion in American made goods by 2023, the campaign is heralding an American manufacturing renaissance; however it may have more to do with economic convenience than concern for the American manufacturing industry.

According to Harold Sirkin, a managing director at Boston Consulting group, Chinese labour costs are now 61 per cent of US levels, up from just 17 per cent 15 years ago. 

Combined with cheaper energy prices and supply chain costs, the playing field for US manufacturing has levelled.

'The pendulum has swung back in favor of the US,' Mr Sirkin said.1

If jobs aren't returning to the US, they are heading to lower cost producers – mostly China's neighbours. Foreign direct investment in Indonesia, Singapore, Malaysia, the Philippines, Thailand and Vietnam rose to a record US$128 billion in 2014, ahead of China's US$120 billion.2 Tellingly however, for most of China's neighbours foreign investment climbed (including the Philippines by 66 per cent), while China's foreign investment has remained steady in recent years.

China's slowing GDP

The static manufacturing industry has contributed to a slowing GDP. China's 2015 growth is tipped to come in at 7 per cent, an enviable rate for the world's developed economies, but around the slowest rate of growth for China in the last two decades and nearly half that of 2007.

Longer term however, economists are predicting an even larger contraction, including Harvard economists Lawrence Summers and Lant Pritchett who forecast growth to be closer to just 3.9 per cent over the next two decades.3

While a vibrant manufacturing industry is needed to underpin Chinese economic growth, there are more reasons for the economic slowdown. China's one child policy has seen the country's working age population peak in 2012 – meaning the country actually has a shrinking workface to support a greater demand for healthcare and pensions.

With around 60 million empty apartments waiting buyers, the housing market, which makes up around 15-20 per cent of China's economic growth, has essentially stalled. And despite April's 7 per cent year-on-year rise in house sales – the first since 2013 – there is little evidence of the backlog being cleared any time soon.

Also, despite the popular rhetoric of China holding large amounts of US debt, the Chinese Government itself has launched on a credit binge since the GFC to fund its growth. Debt levels now sit around 250 per cent of GDP – the highest rate of any emerging market economy. Increasing debt has become an intrinsic part of the Chinese economic model with the Government pouring more and more money into housing and infrastructure projects. It's a model which creates jobs however will ultimately require more and more debt to bankroll as this is just producing vast white elephant housing projects or factories working at just 70 per cent capacity.4

More troubling perhaps is that local government debt loads have doubled to 40 per cent of GDP. What distinguishes local government debt is that much of the debt has been through the shadow banking system which – as the name implies – is rather shady. As a result, the amount of debt owed is actually unclear and almost certainly at higher cost than conventionally issued bonds.

Adding to China's economic woes, addressing the twin challenges of pollution and corruption will also stifle economic growth as businesses adapt to increasing oversight of both.

Chinese economic constraints

China can lay claim to many 'firsts' – the largest population, standing army, hydroelectric dam and even the largest foreign currency reserves.

However, China's position as the world's largest economy (by purchasing power parity) masks underlying weaknesses. After all, by an alternative measure, even though China's economic output was around US$17.6 trillion in 2014, passing the US's mere US$17.4 trillion, per capita income is around only 20 per cent that of the United States – a margin that will likely never be bridged.

There are other 'gaps' which challenge the Chinese economic goal of reaching self-sustaining development.

There are now 190 billionaires and 2 million millionaires in China5. Amazingly however, around 180 million Chinese are still earning less than US$1 a day and the average annual household income is just US$2,100.6, 7

"Income inequality in today's China is among the highest in the world, especially in comparison to countries with comparable or higher standards of living," according to Xu Yie, a University of Michigan sociologist who authored a 2014 report into Chinese income inequality.

And while China is a global manufacturing powerhouse, the influence of Chinese products outside the US is almost non-existent. A 2015 Forbes report recorded no Chinese brands in the top 100 of its 'World's most valuable brands' list, with relatively few of its most successful domestic brands even operating internationally.

Furthermore Chinese companies fall behind in research and development. Even though 2013 saw Chinese citizens file 32 per cent of world's patents (the US was second with 22 per cent) it remains to be seen how many of these are truly ground-breaking with international appeal.


Since China embarked on its economic reforms in 1978, more than 600 million people have been lifted out of poverty as China raced from an agrarian society to a manufacturing powerhouse.

Despite this remarkable achievement, it's widely recognised that Chinese economic growth will slow as their burgeoning middle class reaches a tipping point where young Chinese no longer aspire to be the world's factory and the source of cheap labour dries up.

How China reinvents itself into a consumption, service oriented economy – and embarks on some painful economic reforms along the way – is the Government's next big challenge. The success it has in creating this self-sustaining economy will be a major factor in whether or not China is the first country whose citizens grow old before they grow rich.

6 National Geographic, Economist Intelligence Unit, 27 April 2015

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