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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

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.

which is no longer realistic. The only way you achieve eight to ten percent economic growth is by growing investment at a very rapid pace. Even today investment as a share of GDP is touching fifty percent, which is very large. If China does another stimulus, there would be a lot of waste given that China doesn’t need more investment.

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How will rising wages and the tightening labor force in China affect the US in general and Apple and others whose products are manufactured there?

I think that Southeast Asia will be the big beneficiary, and especially the TIP countries of Southeast Asia — Thailand, Indonesia, and the Philippines.

In a way, this is a role reversal of what we saw in the 1990s. Back then, Chinese wages were very low and there was a devaluation of the Chinese currency. Many people thought these factors triggered the 1998 crisis in East Asia, making those countries uncompetitive. Now, I think the shoe is on the other foot.

As far as the US is concerned, I think the pace of job migration out of the US is decelerating. We’re seeing some people move production back to the US as well. We are seeing a trend now of in-sourcing in the US. I’m not an expert on Apple, but they should be able to move to other locations as well.

In Breakout Nations, you write about countries at China’s development stage facing a middle income trap — in which an inability to innovate blocks them from rising to the ranks of a rich country. Based on your extensive travels in emerging markets, do you think China can surmount this challenge?

I think that China still has some way to go before it faces that. The problem with a middle income trap is that you don’t quite know where it hits you. Some countries have stalled when they achieve a per capita income just ten percent the size of the leading economy in the world, which is the US — that would mean $4,000 to $5,000. Some economies stall at a per capita income level of up to $16,000.

Currently, a middle income trap is not my base case of China. A middle income trap would really be the worst case scenario. It would mean that China would not be able to grow much at all, and that would be a very troubling outcome for the global economy.

Does China have the culture, education system and other attributes needed to produce effective innovators?

I think they do, so far. We have to take it as it goes. One point I make in Breakout Nations is that forecasts longer than three to five years are completely meaningless, because neither you nor I know whether those forecasts will be right.

In that time frame, China has enough to grow at about 6 percent, which is hardly a middle income trap. It’ll obviously have to be able to carry out some innovation to do that. But I think that at a per capita level of six thousand dollars innovation is important but not critical.

China is centrally planned, and its growth is driven mainly by investment. That means the government, not the invisible hand of the market, is the dominate architect of the economy. Conventional wisdom in the US is that governments don’t make good decisions. So will there come a reckoning day when we discover that China made a lot of bad decisions, perhaps invested in a lot of projects that weren’t all that economically efficient?

No, I don’t think so. It’s true that there’s a lot of centrally managed business and investment, but you have to look at the progression. China has systematically gone from complete central planning to a much more private economy over the last two or three decades.

In Breakout Nations, I try to answer this question — whether an authoritarian system or a democratic system is better for growth. In my own research, I looked at more than 120 cases of high growth economies over the past few decades and the answer is fifty-fifty: half were democratic, half autocratic. It’s the quality of leadership that matters rather than the political regime. But the point with China is that the progression has been much more towards the private sector than what it used to be compared to a decade or two decades ago. 

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http://www.globalpost.com/dispatch/news/regions/asia-pacific/china/120802/china-miracle-economy