How Does China’s Manufacturing Keep Growing?

China’s manufacturing sector somehow keeps growing. The expansion even accelerated in October. The central government’s purchasing managers’ index rose to 54.7 from 53.8 in September. That number was well above most forecasts. The HSBC PMI, a product of the big bank, climbed to 54.8 from 52.9.

The answer to the riddle of why China’s manufacturing sector continues to grow is that the People’s Republic has begun to develop a huge consumer base of its own, like the one that began to emerge in the US in the 1950s. Some economists believe that American consumer expansion ended last year and will never return. Experts say that the only way the US GDP can grow without an increase in consumer spending is through exports. That would make the American economy look more like China’s.

The Chinese have several long-term problems which they will have to overcome to keep their economy growing. One is that China will not be able to rely on its own consumers indefinitely. A rise in demand overseas for Chinese goods will have to return. China is still largely an export economy and its top customers are the large Western nations and Japan which face years of tepid growth and high unemployment. Those wretched conditions could continue indefinitely.

China also faces inflation, which is hardly a new observation.  Prices for the raw materials necessary to keep factory output high have begun to increase. Many of these materials are metals and agricultural products, and increasingly oil. China is now the world’s largest net importer of oil, passing the U.S. last year.

China’s future economic problems will also be driven by the demand for wage increases among its factory workers. Sporadic strikes have already occurred. The police cannot prevent them forever. A sharp increase in inflation will affect the Chinese consumer. That will cause them to consume less and demand better pay. On the one hand, Chinese factory output will find fewer customers on the Mainland. On the other, margins at factories will slow. Manufacturers may try to pass rising costs to their overseas customers. Those nations, still caught in recession’s vise, are unlikely to accept any increase.

China’s economy may be in the midst of an evolution that makes its consumers as important as its export partners. But, that may result in price increases which may make the country’s goods less competitive.

Douglas A. McIntyre