A gloomy global macroeconomic outlook, particularly for Europe and the United States. That has already had considerable impact on the Chinese economy as export growth to key markets in Asia, Europe, and North America has slowed significantly since 2010.
The worst is Europe, where exports have recently started falling, causing revenues flowing to China’s industrial sector to slow.
China’s productivity growth has also fallen. Growth in total factor productivity has dropped from an annual average of 4.7 percent in 2001-07 to 2.8 percent in 2008-10.
Earlier rounds of market liberalization and privatization have largely run their course, and the mass reallocation of labor from low productivity agriculture to higher productivity manufacturing is coming to an end.
The massive expansion of capital investment in recent years has caused capital efficiency to fall, effectively “crowding out” productivity growth.
Implications for the national economy
Raising productivity is critical for China’s economic future as the experience of other East Asian economies shows that capital-driven growth is not sustainable.
China still has a long way to go in this regard. While China’s labor productivity has improved a lot over the past decade, it is still behind that of developed countries. This, of course, presents both opportunities and risks.
China’s leaders recognize the importance of productivity to the country’s economic future.
A key objective of the 12th Five-Year Plan (2011-2015) is shifting the growth pattern toward consumption-led, efficiency-focused growth. Companies can, therefore, expect increasing pressure to raise productivity in the coming years.
Industrial policy will be designed to raise productivity, and increasingly to penalize unproductive and wasteful companies.
The government is expected to implement input-factor market reforms in line with the current Five-Year Plan’s binding targets to lift average incomes and increase resource efficiency.
This will have the effect of making cost-inflation a permanent feature in a slowing economy, something that most companies in China have yet to experience first-hand.
Taking a closer look at cost drivers, our analysis shows that both labor and commodity costs have increased substantially in the past five years. Labor costs have increased the fastest, with average wages more than doubling since the beginning of 2007.
In the same period, the average price of commodities consumed by China increased by 51 percent: soft commodities rose 60 percent; metals rose 19 percent; and energy prices rose 77 percent.
We expect these cost increases to continue. The upward pressure on labor costs will persist with the introduction of mandatory employer social-welfare contributions, government targets to increase the minimum wage, rising salary expectations from employees, and the increasing cost of living.
The price of commodities, generally lower in China than globally, will rise relative to international levels as the Chinese government removes administrative controls.
There are plans to link city-gate natural-gas prices with prices of imported fuel oil and liquefied petroleum gas in two provinces.
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