China Faces Upgrade-or-Die Deadline as Supply of Labor Dwindles

Japan in 1969

China’s income growth and stage of economic development is similar to Japan in 1969 and South Korea in 1988, before their rates of expansion fell, according to Morgan Stanley. Japan’s growth slid to an average 5.2 percent in 1970-79 from 10.4 percent in the previous decade, the bank said. South Korea’s expansion cooled to 6.3 percent in 1989-98, from as much as 12.3 percent during the previous decade, government data shows.

Only five economies -- Japan, South Korea, Taiwan, Hong Kong and Singapore -- have moved from middle-income nations to developed country status while maintaining relatively high growth rates, according to Nobel laureate Michael Spence, a professor of economics and business at New York University’s Stern School of Business.

China’s economic growth may ease to 9.2 percent this quarter from 9.5 percent in the previous three months, the China Securities Journal reported Aug. 16, citing the State Information Center. The country’s inflation may rise to about 6.2 percent in the same period, from 5.7 percent in the previous quarter, the report said.

Higher Wages

“Inflation is serious now,” said Chen Mei, 23, during her lunch break in the southern manufacturing city of Dongguan. Chen, a migrant, said she’s earning about twice the monthly minimum wage of 1,100 yuan ($172) and expects pay at the garment factory where she works to keep rising as prices increase.

The yuan’s 7 percent rise against the dollar since June last year has intensified cost pressures faced by China’s exporters, which price their products in the American currency.

While the bulk of China’s producers have yet to upgrade, high-technology exports are rising, recording a 31 percent jump in 2010 to $492 billion. That’s more than double the $218 billion in 2005 and almost a third of total shipments, according to the customs bureau.

Investment Theme

Economists including Deutsche Bank AG’s Ma Jun say companies that successfully make the transition will reap huge benefits.

“The single most important investment theme for China’s manufacturing sector over the next five years is its upgrading,” said Ma, Hong Kong-based chief China economist for the bank and a former researcher for China’s State Council. Investors have yet to price in the “potential outperformance” of the sector, he said.

Companies such as machinery makers Sany Heavy Industry Co. and Changsha Zoomlion Heavy Industry Science & Technology Development Co., will “emerge to be major winners not only domestically but internationally” said Diane Lin, a fund manager with Sydney-based fund Pengana Capital Ltd., which manages about $1 billion in global assets.