Consumption cannot be only driver (2)

But China cannot rely on consumption as its only growth engine. History has shown that a one-dimensional development model cannot ensure sustainable competitiveness, just as no single market can sustain global demand. Given this, China must continue to develop its manufacturing sector.

China is the world's top manufacturing country by output. But, while it accounts for 19.8 percent of total global manufacturing, it receives less than 3 percent of the world's manufacturing R&D investment. As a result, China's capacity for innovation remains relatively low, with its high-tech and knowledge-intensive industries unable to compete globally.

On average, China's industrial enterprises are relatively small, and, although its industrial labor productivity (real manufacturing value added per employee) has improved over the last decade, it remains much lower than that of developed countries - 4.4 percent of the US' and Japan's productivity, and 5.6 percent of Germany's. And the "pauperization" phenomenon - in which companies must adjust their commercial strategies to cope with an impoverished consumer base - is increasingly affecting traditional industries, further undermining China's capacity for sustainable development.

Moreover, the quality of Chinese-manufactured products continues to lag behind that of developed countries' manufactured goods. Whereas one unit of intermediate input in developed countries typically generates one unit or more of added value, in China the ratio is only 0.56.

As China's demographic dividend disappears, its low-end labor market is shrinking, driving up its once rock-bottom labor costs and diminishing its rate of return on capital. Over the next decade, as Chinese workers demand higher salaries, basic benefits, and improved working conditions, the country may well lose the comparative advantage that has driven its manufacturing boom.

While manufacturing wages remain significantly lower in China than in the US, the rapidly narrowing gap is already fueling US reshoring. Given that Chinese wages are rising at an annual rate of 15 to 20 percent, productivity adjusted wage rates in low-cost US states are expected to exceed those in some coastal regions of China by only 40 percent in 2015. Add to that reduced energy costs in the US, owing to the country's shale-gas revolution, as well as the global supply chain's complexity, and China's cost advantages will soon be negligible.

We recommend:
Online turnover surpasses 1 trillion yuan in 2012	Jack Ma to step down as Alibaba CEO	FDI sees 1st decrease in 9 years amid slowdown
China helps drive Rolls to record year	Top Ten Economic Events in 2012	CIC seeks balanced portfolio