The end of the cheap 'made in China' era is nearing for many economic and demographic reasons. Chinese global exports are shrinking from their peak of 35.4% year over year growth in 2004 according to the US-China Business Council. (1) This occurred the same year China allowed its currency to appreciate 21% in value according to Alex Kowalski and Tom Keene of Bloomberg Financial News. (2) What's more, lower demand for Chinese exports may cause manufacturers to increase prices to compensate for lower sales.
Another factor that could amount to the end of cheap made in China era is domestic lending. Domestic lending is an indicator of increased demand for goods and services that tend to be cost drivers. The Economist reports Chinese banks have been lending tremendous amounts of money to businesses, infrastructural development and consumers; more specifically, to the tune of 127% of the country's GDP in 2009.(3) Recently, one of China's four largest banks, The Agricultural Bank of China raised billions of dollars in a dual public offering indicating solvency and lending are important factors in China's banking plans.
In 2010, the World Bank forecasts China's GDP will grow 9.5% (4) which is enviable to a mature economy that would be lucky to squeeze out 3% growth in GDP in any given year. This economic expansion has been going on for most of the 2000's, and combined with the high savings rate of Chinese consumers demonstrates its capacity for growth is becoming less driven by cheap exports and more by domestic growth and economic maturation.
As the results of the financial crisis from 2007- 2009 have made clear, China's reliance on cheap exports is not immune from declines in demand. According to the International Monetary Fund (IMF), China and other Asian countries face economic policy challenges that allow their economies to continue to grow through Chinese business and consumer demands, rather than solely through demand for Chinese exports that are no higher, if not lower than levels before the financial crisis.(5)
As China's economy develops, and its banking system becomes more refined, the labor force will become wealthier, and the nature of the Chinese job market itself will lead to higher paying jobs that could stifle cheap Chinese made exports. Even though China's workforce is large, economic pressures do exist and quite possibly may drive up both demand for wage increases and increase the cost of domestic materials used in manufacturing.
As the wealth and savings of Chinese consumers, corporations and government has increased, the increasingly sophisticated economy has experienced a second loosening of the Chinese currency, the Yuan-Renminbi. The loosening of the Yuan's peg to the U.S. Dollar is only fractional and relatively small, it does indicate China is willing to do so and may be willing to do so more in the future. What's more, even a small percentage fluctuation in currency valuation can have a dramatic affect on the price of goods through supply and demand relationships.
As the Chinese economy matures the country as a whole is becoming wealthier, this is at the root of the ending of the cheap 'made in China' era. Several years of very high economic growth in the Chinese economy will most likely lead to an eventual higher demand for goods and services which puts cost pressures on industries and manufacturers seeking to provide cheap exports to foreign nations. This price pressure may be tamed by inflation reducing measures such as increased lending rates, however with 2010 growth forecasted to be over 10% of GDP it's hard to imagine putting the brakes on an economy with such high momentum for the sake of eliminating inflation of any kind.
Another factor that could amount to the end of cheap made in China era is domestic lending. Domestic lending is an indicator of increased demand for goods and services that tend to be cost drivers. The Economist reports Chinese banks have been lending tremendous amounts of money to businesses, infrastructural development and consumers; more specifically, to the tune of 127% of the country's GDP in 2009.(3) Recently, one of China's four largest banks, The Agricultural Bank of China raised billions of dollars in a dual public offering indicating solvency and lending are important factors in China's banking plans.
In 2010, the World Bank forecasts China's GDP will grow 9.5% (4) which is enviable to a mature economy that would be lucky to squeeze out 3% growth in GDP in any given year. This economic expansion has been going on for most of the 2000's, and combined with the high savings rate of Chinese consumers demonstrates its capacity for growth is becoming less driven by cheap exports and more by domestic growth and economic maturation.
As the results of the financial crisis from 2007- 2009 have made clear, China's reliance on cheap exports is not immune from declines in demand. According to the International Monetary Fund (IMF), China and other Asian countries face economic policy challenges that allow their economies to continue to grow through Chinese business and consumer demands, rather than solely through demand for Chinese exports that are no higher, if not lower than levels before the financial crisis.(5)
As China's economy develops, and its banking system becomes more refined, the labor force will become wealthier, and the nature of the Chinese job market itself will lead to higher paying jobs that could stifle cheap Chinese made exports. Even though China's workforce is large, economic pressures do exist and quite possibly may drive up both demand for wage increases and increase the cost of domestic materials used in manufacturing.
As the wealth and savings of Chinese consumers, corporations and government has increased, the increasingly sophisticated economy has experienced a second loosening of the Chinese currency, the Yuan-Renminbi. The loosening of the Yuan's peg to the U.S. Dollar is only fractional and relatively small, it does indicate China is willing to do so and may be willing to do so more in the future. What's more, even a small percentage fluctuation in currency valuation can have a dramatic affect on the price of goods through supply and demand relationships.
As the Chinese economy matures the country as a whole is becoming wealthier, this is at the root of the ending of the cheap 'made in China' era. Several years of very high economic growth in the Chinese economy will most likely lead to an eventual higher demand for goods and services which puts cost pressures on industries and manufacturers seeking to provide cheap exports to foreign nations. This price pressure may be tamed by inflation reducing measures such as increased lending rates, however with 2010 growth forecasted to be over 10% of GDP it's hard to imagine putting the brakes on an economy with such high momentum for the sake of eliminating inflation of any kind.
Sources:
1. http://bit.ly/xPQKT (US-China Business Council)
2. http://bit.ly/c8SqEW (Bloomberg Businessweek)
3. http://bit.ly/cA5cKs (The Economist)
4. http://bit.ly/98bBJz (World Bank)
5. http://bit.ly/cc743y (International Monetary Fund)
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