Two Simple Charts Show Why China Is Losing Business To Its Emerging Market Neighbours

Chinese GDP growth hit its lowest level since 1999 last year. Part of the slowdown is being driven by Beijing’s efforts to rebalance the economy away from exports and investment-led growth to domestic demand driven growth.

In a new report, Henry McVey, head of Global Macro & Asset Allocation at KKR, writes “China must now appreciate that it ‘cannot go on indefinitely’ as the world’s low-cost manufacturer of low value-added goods.”

McVey cites two key reasons for this.

First is wage inflation, which folds into Beijing’s efforts to boost consumption. This has caused China “to price itself out of an increasing number of traditional low-end manufacturing and export mandate.” Meanwhile, countries like Indonesia, Vietnam, Cambodia and Laos have gained competitive advantage when it comes to manufacturing.

Moreover, we’ve also seen a steady appreciation in the yuan against the greenback in recent years, and this has also hurt China’s manufacturing competitiveness. Furthermore, this has come at a time when other emerging market currencies have been depreciating.

“We expect the impact of CNY appreciation in the past year to be felt this coming year, limiting the strength of China’s export recovery in 2014. As such, the era of steady CNY appreciation may be drawing to a close,” UBS’ Wang Tao wrote in a note to clients.

We’ve seen more yuan volatility in the last week and Tao thinks this could signal a change in China’s exchange rate policy.

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