export_vanEngagingChina has always hoped that China would one day realise that its policy of aggressively stimulating its  export-led economy would end in tears if pursued indefinitely. It looks like that day has arrived.

China is now rethinking its growth model, according to the Standard & Poors rating agency, which predicts that real growth rates of 7% to 7.5% are likely for 2014 and beyond in a recent report.

The days of GDP growth of over 9% in China appear over. Growth of 7% to 7.5% seems to be the ‘new normal’; the authorities now seem comfortable with growth rates that they recently viewed as unacceptable low”

Of course a slowdown in growth was inevitable as China converges with other economies.  And, according to many western observers, a slowdown is not just long overdue but also very necessary.

But only recently have China’s political leaders been prepared to think the unthinkable and accept that a slowdown is necessary to create a more sustainable economy.

Interestingly, one of the factors that may have swayed them is the strength of the Chinese labor market, which means the government sees less need to support wages and social stability — a key concern in a country of 1.3Bn people.

Wage rates in China have been rising at double-digit rates in recent years. The government realizes it can now take its foot off the gas as there is less need to create jobs to soak up the excess pool of labor created as workers move from the agricultural sector to  manufacturing jobs characterized by higher productivity.

Due largely to the success of China’s one child policy, the excess supply of labor is on the verge of a sharp decline.

Standard & Poors points out that China’s  leaders have been less suceessful in changing the economy towards a consumption-oriented growth model.

Despite the frequent media reports in the West describing the rise of China’s free-spending middle class, China has the lowest consumption-to-GDP ratio in Asia.  Standard &  Poors argues more income needs to be channeled into the household sector but that will take far-reaching structural reforms that will take many years to bear fruit.

So, what does all this mean for Western businesses in China? There are two  takeaways, I’d argue: First, labor costs will keep rising in China, so businesses that still see China as primarily a low-cost manufacturing base may be in for a shock.

Second, China’s much-vaunted transformation towards a modern consumption-based economy is going to take a long time. So  consumer-focussed businesses may want to rein in overly-aggressive expansion plans and accept that consumption — like wealth — will continue to be spread very unevenly in China.

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