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China is changing. Its miraculous growth is slowing. Wages are rising. The endless labor supply has reached its limit. It’s normal for economies to ebb and flow, but a more fundamental shift is emerging. This series explores that trend and the people for whom it's a daily reality.

China economy old new
Beijing--from 1989 to 2012. (Tommy Cheng and Ed Jones/AFP/Getty Images)

Is China’s miracle economy crumbling?

Q&A: Ruchir Sharma, Morgan Stanley’s emerging markets chief, explains China’s slowing growth, rising labor costs and the myth of the underperforming consumer.

China is changing.

For the past decades, the country has largely been defined by surging economic growth — which has transformed its landscape, pulled hundreds of millions from poverty and changed its culture. That growth is now declining.

Consider the numbers.

This year, Beijing expects GDP to expand by 7.6 percent. That’s brisk by global standards, but lethargic for China, where the economy grew by more than 10 percent for five years beginning in 2003. It peaked at a robust 14.2 percent in 2007, nearly twice the rate expected in 2012.

It’s normal for economies to ebb and flow, and some of China’s slowdown is no doubt linked to the debt crisis in Europe, its biggest export customer. But a more fundamental shift appears to emerging.

Unemployment is low, workers are gaining power to negotiate, and wages are rising; they’re expected to triple between 2011 and 2017. In short, China’s greatest resource — its seemingly inexhaustible supply of cheap labor — has reached its limit.

To Americans, this matters.

China is a robust piston of economic growth, so a slowdown would have global consequences. Obviously, factories in the Pearl River Delta make much of what we buy: electronics, clothes, furniture and the like. As Chinese labor costs rise, that will affect the prices we pay. The good news: bigger paychecks mean more money for Chinese consumers to spend. China is the world’s third biggest importer, purchasing over $100 billion dollars worth of goods from the US.

To put China’s changes in perspective, GlobalPost spoke with Ruchir Sharma, author of Breakout Nations, an insightful analysis of why some countries excel while others languish. Sharma is Morgan Stanley’s head of emerging market equities and global macro strategy. He travels extensively, generally spending one week each month in a developing country.

The interview has been condensed and edited by GlobalPost.

For years, analysts have bemoaned Chinese consumers’ relatively small contribution to economic demand. Will higher wages in China finally unleash the promise of the Chinese consumer, with all its hoped for benefits as a new engine of global growth or is this a myth?

The case of the missing Chinese consumer is a myth. Consumption in China has already been growing in real terms, about 8 percent per year for the past decade. That’s a very fast clip. The only reason why it looks like the Chinese consumer is suppressed is because the other drivers of the economy — exports and investment — have been running at an even faster pace. So there’s an appearance that 8 percent consumption growth in real terms is a bit slow.

With wage increases, Chinese consumption can continue to grow at about 8 percent. Consumption will rise as a share of GDP, as export and investment growth slows down. That is what I think is happening right now.

Consumption never grows faster than 8 percent in any country. Even in the miracle economies of Japan, Taiwan and Korea — at the peak of their booms — consumption never topped eight percent on an annualized basis.

In Breakout Nations, you talk about reforms that have emerged every four or five years to reinvigorate China. This year, Beijing is struggling with a relatively rocky leadership change. Are there reforms that the new leadership should embrace that would further help China grow? And are they likely to embrace them?

The most important thing — which I think they’re already doing but that they could do better — is to realize that the days when China could grow at double digits are over. Even 8 percent growth is not very feasible any more just because the law of large numbers has caught up with China. Its base is very large, and its per capita income is about $6,000.

China isn’t a sprinter any more. It’s now a middle aged country, and the growth rate needs to be adjusted accordingly. They need to keep moving towards greater reform and less stimulus kind of growth.

Growth was going down even by 2008 or so, and then they suffered a massive economic crisis in 2009, and they panicked about it and launched a massive stimulus effort.

So the most important thing is to not make the big mistake of launching some massive stimulus to try to achieve a growth target