NEW YORK (TheStreet) --China is shifting away from relying on exports and foreign investment toward an economy driven by consumption.
Unsustainable government debt levels and environmental problems have prompted this change. Over the past five years, accommodative monetary policy and surging investment levels have led to average growth rates of 9.3%. Times have changed, however, and that growth won't last. China's shift will weigh on growth, pushing growth domestic product growth down to the 6% region in the next half-decade.
On the positive side, a declining work force will help the country avoid the usual increase in unemployment that tends to accompany this kind of transition. China's target growth figure for 2013 is 7.5%, slightly above the rate of expansion necessary to absorb new participants in the labor market. By 2018, the GDP growth rate required to maintain stable employment levels will drop below 6.5%, with unemployment contained by an aging and shrinking workforce, and by increases in service-sector jobs in areas like logistics.
As China makes the transition to a more service-based economy, the labor market should remain relatively healthy despite the expected slowdown in growth.
The challenge for China's Community Party will be to avoid social instability even as productivity and the country's position as "the world's factory" start to decline. The official position has been to gradually revise lower the accepted growth levels that will be needed to maintain stable employment.
In 2010, Premier Wen Jiaobao stated that 8% GDP growth was necessary to achieve that. Comments this year from China's finance ministry have brought that figure down to 6.5%. It is clear that China sees a need to make its case for the benefits of slower growth -- and to prepare its people for an economy likely to experience previously unseen difficulties during the next five to 10 years.
Estimates from the United Nations suggest that China's working-age population will drop from 944 million in 2010 to fewer than 930 million by 2020. As a proportion of China's population, the percentage of active workers will fall from nearly 70% to less than 65%. Since manufacturing jobs contribute far more to GDP growth than service-sector jobs do, the expectations for slower GDP growth aren't surprising.
China's finance ministers will face credibility issues if the transition from a manufacturing economy to a service economy fails to generate sustainable employment. In early 2010, Chinese GDP grew by 11.9%, and has fallen by nearly 4.5 percentage points since then.
This quarter, economic data are showing signs of stabilization and building business confidence. Figures from the labor ministers indicate that jobs in urban centers increased by 7.3 million, a slight improvement from the 6.9 million seen at the same time last year.
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Not all has been positive, however, as large companies like shipbuilder China RongSheng Heavy Industry Group have enacted massive layoffs and the employment components in several manufacturing surveys have suggested weakness.
Now that the leadership in China has publicly admitted its inability to maintain double-digit growth, its next task will be internal: convincing its people that policy measures will use the country's changing demographics to their advantage, and aim at creating a stronger labor market that relies less on foreign sources.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Cox is based in China, and has lectured at several universities there on international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of Web sites, including MarketBulls.net, Seeking Alpha, FX Street and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.