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Saturday, August 18, 2012

Will China's Consumers Save It From a Hard Landing ?

Not likely, argues Cam Hui in his SEEKING ALPHA piece,'Could China Be Rebalancing Growth To The Wrong Consumer?' , excerpted below.

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China's official policy is to rebalance its engine of growth away from infrastructure-led investment to the Chinese consumer (for examples, see "Crouching Tiger, Hidden Profit" and "China Beyond The Hard/Soft Landing Debate"). Having hit a recent slow patch, it appears as if the Chinese authorities have decided to pull out all the stops to stimulate growth using the same old policy tools of infrastructure spending again ahead of the leadership changeover this year...

Already, the strains are starting to show. The Chinese competitive advantage of a seemingly inexhaustable supply of cheap labor is starting to erode. Wage pressures are rising as fewer and fewer workers are migrating from the countryside to search for work in the cities. In reaction, the decision of multinational companies to offshore production to low-wage countries like China is not the no-brainer it once was. Indeed, a recent poll by Boston Consulting Group (full study here) indicates that more than one-third of American manufacturers are considering reversing the offshoring trend and bringing the jobs back to American shores...

This development must be particularly worrisome to Chinese policymakers and makes the objective to rebalance growth away from infrastructure spending to the Chinese consumer far more urgent. In this way, the Chinese economy would be able to grow more sustainably by creating a new source of demand from their own domestic economy. Alas, it does not appear likely to happen as refocusing growth away from infrastructure spending would seriously hurt Party insiders who have gotten obscenely rich in this boom...

Ironically, the latest Chinese move to engage in the more-of-the-same infrastructure-based stimulus will have the effect of rebalancing growth away from infrastructure spending to the consumer. But instead of the Chinese consumer, it will be the American consumer as the reverse offshoring trend starts to take hold and accelerate.

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