Growth

How China’s current account surplus will evolve in the coming years is one of the key questions on the economic outlook, both for China itself and for the global economy. China’s increasingly competitive manufacturing sector will continue to power ahead, to expand exports and to gain global market share. At the same time, China’s domestic economy should continue to grow rapidly, thereby drawing imports. However, how this will on balance play out with regard to the current account surplus is less certain. It will largely depend on how much progress is made with rebalancing the economy.

China’s export volumes have continued to rise very rapidly in recent years.An increasing array of manufacturing sectors is becoming more competitive internationally, including many types of machinery and equipment. Competitiveness is boosted by technological catch up, movement up the value chain, and economies of scale as well as by traditional strengths such as infrastructure and the business climate. Reflecting these factors, labor productivity growth in manufacturing has remained solid, thus helping containing unit labor costs despite respectable wage growth.

Some have argued that China is losing its competitive edge because its export prices are rising. However, that is an incorrect inference. Higher raw commodity prices mean export prices are rising all over the world—not just in China. Prices of US imports from China are now rising at the same pace as those of US imports of manufactured goods from developed countries. But those of US imports of manufactured goods from other emerging markets and developing countries are rising faster. On this price metric, the most we can say is that China’s competitiveness is improving at a slower pace than before.

Compare South Korea and Malaysia in 1970 and compare them again in 2009. South Korea was a third poorer back then and is now three times richer. Even more remarkable has been South Korea’s ability to widely share the benefits of this spectacular feat across broad segments of society. South Korea’s strong focus on broad-based human capital development allowed the country to transform itself into a high-income economy, while at the same time reducing income inequality and improving social outcomes.

The World Bank released its latest Quarterly Update on China’s economy on Friday (for disclosure's sake: I’m the lead author). At the press launch, there were a lot of questions about the recent wage hikes in several foreign-owned manufacturing companies and the possible concerns these have triggered among many about possible loss of competitiveness and/or a wage-inflation spiral. There were also, as usual, quite a few questions about the exchange rate.

Meanwhile, the People’s Bank of China over the weekend announced the plan to re-introduce more flexibility in the exchange rate regime, after almost 2 years of a de facto peg to the US dollar. This is likely to set the stage for a stronger exchange rate over time.

In this blog post I summarize our main conclusions and views, including our fairly sanguine views on the implications of the wage increases and our quite positive assessment of developments and prospects generally. I would argue that the timing of the move on the exchange rate suggests that China’s authorities broadly agree that, overall, the outlook on exports, growth, and competitiveness in China is fairly good.

In a later post, coming out in a few days, I will focus on the medium term scenario that we did as background work for this quarterly.