Weekend Economists Examine (E)sc(h)atology January 24-26, 2014

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75. China Has Gone From Making The World's Stuff To Buying It

http://www.businessinsider.com/china-from-makers-to-consumers-2014-1

For the better part of 20 years, China has been the world’s factory, and its low labor costs have helped tamp down inflation in developed nations by allowing them to import cheap, Chinese-made goods. The torrent of foreign direct investment (FDI) that flowed into mainland China—some $900 billion since 1990, according to United Nations data—helped finance factories along the southeastern coast that slaked the global thirst for inexpensive goods. It also underpinned phenomenal economic growth. The country’s GDP grew from $357 billion in 1990 to $9.3 trillion last year, a nearly thirty-fold increase in a single generation. But that growth also spurred deep social changes. Millions migrated from inland, rural provinces to coastal cities in search of manufacturing jobs, and some 300 million Chinese vaulted into the middle class. The net result: China’s days as the world’s low-cost factory are numbered. They’re going to be buyers now.
That shift has picked up pace in the last five years, says Robert Prior-Wandesforde, Credit Suisse’s Head of Macroeconomic Research for Southeast Asia and India, who recently published a report entitled, “Asia: FDI Truths, Myths and Prospects.” The latest catalyst, of course, was the global financial crisis, the ensuing economic slowdown that sapped demand for China’s industrial output, and the immediate response from the country’s leaders—a huge dose of Keynesian stimulus.

To a large extent, the strategy worked. Beijing was able to maintain domestic demand and strong economic growth during the worst of the global slowdown, while building infrastructure that in some cases has leapfrogged that of the West. China’s high-speed rail system, for example, may still be relatively small for such a large place, but it far outstrips what the United States has been able to build in the last 50 years. The country’s middle class remains vibrant, and a growing sense of national pride underpins an increasingly muscular foreign policy. But there are limits to what Keynesian spending can do, and there is an emerging consensus in China that the response to the financial crisis was excessive. The country’s new leaders, headed by President Xi Jinping, seem to have concluded that they can no longer rely on government spending, which has caused local government debt to soar, to underpin domestic demand.



Read more: http://www.businessinsider.com/china-from-makers-to-consumers-2014-1#ixzz2rVxc1kGS