Opportunities as well as costs as China’s economy adjusts
Rising wages have fuelled higher consumer spending
Globalisation is perhaps exemplified by China’s development into an economic behemoth that is now hard-wired into the world’s supply chain. But that also means that as China’s economy evolves, there will be costs felt locally and globally but also opportunities to be taken.
Transitioning to a “new normal” where China’s economy is more domestic consumption-based than driven by investment and exports, entails a slowdown. While that “will have negative consequences for some countries, it is also creating opportunities for others”, Asian Development Bank (ADB) chief economist Shang-Jin Wei wrote last month.
On the plus side, “despite slower growth, China’s household consumption has been rising and the country’s market remains one of the world’s most promising”, Wei said.
Rising wages in China have fuelled higher consumer spending but rendered obsolete the old image of the Chinese economy as being driven by an industrious but poorly paid workforce producing competitively priced goods for export and whose productivity was enhanced by investment from foreign capital seeking better returns than were on offer elsewhere.
In fact, “China’s labour cost has risen by more than 100 per cent in the last 10 years, leaving many other countries – not just Vietnam or India, but also other populous countries like Bangladesh and Myanmar – with much lower relative labour costs”, Wei noted.
Consequently, “Bangladesh, for example, has already begun to take advantage of China’s withdrawal from the low-end segment of the garment market”, he said.
Meanwhile, as the combination of inward investment and overseas demand for cheap Chinese-manufactured goods fed a stronger yuan, China’s attempts to move away towards a slower-paced, less export-driven economic model, arguably lends itself to capital outflows and a weaker yuan.
Beijing will logically deploy policy tools to seek to manage the pace of capital outflows and attendant yuan weakness but the die is likely cast.
In that regard, China has already drawn down on its foreign exchange reserves, largely regarded as being held in US Treasuries, to stem the pace of yuan weakening. That might be expected to weigh on US government bond prices and push up US yields, but so far that has not been the case.
In fact, general concern over the slowing pace of Chinese economic growth is likely pushing investors globally into US Treasuries as a safe haven, cancelling out and trumping the effects of sales of US paper by China as Beijing moves to stem the pace of the yuan’s depreciation.
Additionally, as China seeks to work off the excess capacity in its economy, that should put downward pressure on prices which, when combined with the effect of a weaker yuan, means China, albeit without intent, ends up exporting deflation to the rest of the world.
The deflationary impulse will be compounded if other Asian economies choose to depreciate their own currencies to avoid losing competitive advantage with China.
As the United States, to name but one economy, then imports deflation from China and others through the trade channel, that would support the prices of US Treasuries as investors seek to lock in yields today lest, even if the Fed has tightened, they fall tomorrow.
Elsewhere those economies seen as most closely linked to China’s continuing economic expansion at the old pace face challenges.
“The first phase of globalisation was always going to be energy and commodity-intensive. But it is far from clear that the next phase of globalisation will have the same patterns,” London-based SLJ Macro’s Steven Jen wrote last week.
During that first phase, the Australian dollar soared as Australia’s mining sector made then seemingly rational but monumental bets, with borrowed money, on a continuation of China’s apparently insatiable appetite for commodities, only to discover that even the largest of appetites can be sated.
Those borrowings still have to be repaid even if the projects are now unviable while at the same time the soaring Aussie dollar was the final nail in the coffin of Australia’s car industry, rendering it uncompetitive.
Australia will ironically end up exporting iron ore to make the steel to build the cars that Australians will then buy as imports.
But it would be unfair to end on a sour note.
“Because the Chinese economy is so much larger now, even 6 per cent growth today would contribute more to world output than 10 per cent growth before the global financial crisis,” the ADB’s Wei said.
That means opportunities aplenty, not just costs, as China’s economy adjusts.