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Guest Blog - China Shifts Gears, Asia Benefits: Neumann

Frederic Neumann|Co-head of Asian Economic Research, HSBC
Monday, 21 Mar 2011 | 1:22 AM ET

China, at last, is getting serious about rebalancing. At the National People's Congress, the country's annual legislative session which concluded this week, leaders unveiled a new five year development plan.

Eightfish | Getty Images

In a nutshell: China will now go for quality, rather than quantity. The growth target was cut to 7 percent per year from 7.5 percent in the previous plan. Admittedly, with growth clocking over 10 percent, officials widely missed their mark last time. And they might over-deliver yet again. Still, they adopted an entire laundry list of policies which will finally rebalance the economy.

The share of consumption in national expenditure, at 36 percent, is among the lowest in the world. Investment, by contrast, accounts for nearly half of total spending. These shares need to be reversed for growth to be sustained.

China's leadership is providing better health-care, education, and pensions and also tolerating a faster rise in wages. At the same time, China is going green, aiming to rein in its rampant demand for energy, which, apart from some efficiency gains, can only be achieved by slowing down investment.

As China retools its economy, the rest of Asia will breathe much easier. The obvious bit is that more household spending on the Mainland will begin to attract cars from Thailand, coffee from Vietnam, and other products that might be of interest to the modern Chinese consumer.

The less obvious, but far more important part of this story, however, is that China will inevitably cede ground in export markets to other Asian economies.

Less investment and faster wage growth will push up production costs. This doesn't matter so much for high-tech industries that the country aims to conquer. But, at the lower end, China is likely to see competitiveness erode in sectors such as apparel, shoes, and toys, as well as some electronics assembly.

Production will therefore migrate to other parts of Asia, most prominently India and the ASEAN economies. The real story for the discerning investor, in short, is not that China is boosting consumption, but that, at last, the rest of Asia will once again find a competitive niche against its bigger neighbor.

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The author is Frederic Neumann, Co-head of Asian Economic Research, HSBC

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