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No Second Chances 

Project M 

Markets 

12/11/2013 

With opinions on the future growth of its economy divided and past performance probably not indicative of results to come, China needs to change its economic model – or face danger, according to economist George Magnus.
This article was originally published in Project M, an Allianz SE International Pensions publication featuring unique perspectives on investments and retirement.

China’s economic machinery has stepped off the gas, and its recent double-figured annual growth rates today seem unattainable.

Yet, the latest Hongkong and Shanghai Banking Corporation (HSBC) Global Connections Report on China (February 2013) forecasts the economy gathering pace: “Chinese exports will increasingly head to rapidly growing markets in developing economies, as the industrialized nations remain subdued.” The report sees a shift to more sophisticated industries, such as the chemical sector, by 2030.

By contrast, economist George Magnus, author of The Age of Aging: How Demographics are Changing the Global Economy and Our World (Wiley, 2009), believes China is on the road to becoming a ‘normal’ country, and will face conventional and traditional economic issues and challenges that could hog-tie further economic growth. The man widely acknowledged with having identified the trigger points leading to the 2008 financial crisis suggests significant changes to China’s economic model are needed to retain highs and stabilize growth. “China requires extensive political reform, more-robust institutions and a tilt in the role of the state towards supporting enterprise.”

Magnus believes a lot of the things that have made China special in the last 10 to 20 years no longer exist, or are changing. Referencing WTO membership, high-school enrollment and accomplishing rural-tourban labor transfer as one-off chances, the renowned economist sees the economy in danger of becoming trapped.

China’s per capita income will rise very quickly by the end of this decade to a figure where upper middle-income countries tend to get stuck – unless it can reform and develop. New strategies and processes are needed to avoid this so-called Middle Income Trap. The biggest challenge is moving from resource-driven growth that is dependent on cheap labor and capital to growth based on high productivity and innovation. This requires investments in infrastructure and a skilled workforce.

Yet, like most European and Asian countries, China is experiencing major demographic changes. As life expectancy increases and birth-rates decline, the working population is either growing slowly or shrinking. According to recent figures released by the National Bureau of Statistics, China’s working age population fell for the first time ever in 2012, from 1.3 billion to 1.0 billion workers. Not a large drop in official numbers, but as the demand for skilled workers increases, cheap labor will be in short supply. This in turn will begin to erode China’s competitive edge.

Reverse Offshoring

“China’s manufacturing strategies will have to get smarter,” says Magnus. Returning to production at home, which had been previously offshored to low-wage countries, would save on costs generated from issues such as quality, logistics and brand capital. Unless there is ongoing political reform and the provision of robust institutions, China will soon face the danger of falling behind its competitors.



The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 

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