Advertisement
Advertisement
China is losing its competitiveness is terms of labour costs. Photo: EPA

End of easy money will test the slowing Chinese economy

Bob Baur and Robin Anderson say reforms will take time, but Beijing will rise to the challenge

As the US Federal Reserve trims its stimulus programme, the easy-money policies that have encouraged strong cash inflows to China and emerging economies will also begin to taper off. The impact of this could be significant as central banks in emerging markets follow suit and implement tightening measures to curb liquidity and protect their currencies' values.

For China, the subsequent slowing demand from these emerging markets may constrain its export growth. In parallel, the slow and painful recovery of the European Union is unlikely to help boost China's exports to what is currently its largest market.

Besides, China is losing its competitiveness is terms of labour costs.

In some sense, China has become a victim of its own success. It earned its "world factory" status with a huge and cheap labour force and in 2009, it became the world's biggest exporter. The popularity of these "Made in China" products have, in turn, enabled Chinese workers to earn more. And the rising wages have made China relatively less competitive. Indeed, the end of cheap labour, together with other challenges of doing business in China, have led some US companies to begin to shift manufacturing back home.

Of course, a substantial US-China bilateral trade deficit remains. In the medium-to-long term, however, this will probably start to look like an "investment" made by the US to help the Chinese achieve income levels sufficient to become significant consumers of goods and services originating in the West.

The rebalancing of China's economy has also led to the end of a decade-long commodity bull market, built largely on China's demand for resources like iron ore and coal to support its infrastructure projects and rising energy needs. With China's economy slowing, a drop in demand for industrial metals has led commodity prices to lose momentum globally.

Even with the challenges ahead, a growth target in the range of 6 to 8 per cent for 2014 is within reach for China. The cooling economy will have to cope with a trade-off between stimulus and the establishment of a foundation for sustainable growth.

Analysts were hoping that the reforms announced at the Communist Party's third plenum would lead to a soft landing and catapult China towards a consumer-driven economy. This no doubt remains the way forward, but the kind of structural reforms required will not happen overnight.

China is a country that emphasises long-term planning and, as a result, significant change will be at a trot rather than a gallop as we approach the Year of the Horse.

This article appeared in the South China Morning Post print edition as: End of easy money will test Chinese economy
Post