Manufacturing remains key to China's economic transformation

China's economy is at a crossroads. Foreign and domestic observers alike are asking which path the country's economic development should take in the next decade. How can China ensure stable and sustainable growth in the face of significant internal and external challenges, including slowing medium- and long-term growth, rising labour costs and growing inflationary pressure?

After the global economic crisis weakened external demand, which sustained China's unprecedented economic growth for three decades, the authorities agreed that internal demand, especially domestic consumption, must become the country's new growth engine. At the Communist Party's congress in November, leaders declared their intention to double per capita income by 2020, unleashing 64 trillion yuan (HK$79 trillion at exchange rates now) of purchasing power.

Indeed, with some 130 million middle-class consumers, China's domestic market holds significant potential. The Boston Consulting Group estimates that, with an average annual GDP growth rate of 7 per cent in China and 2 per cent in the United States, Chinese domestic consumption will rise to half of America's by 2015, and 80 per cent in 2020 (assuming that the renminbi appreciates at an average rate of 3 per cent against the US dollar over the next few years).

Moreover, the current-account surplus plummeted from more than 10 per cent of gross domestic product in 2007 to 2.8 per cent in 2011, reflecting China's decreasing reliance on exports to drive economic growth. In 2010, China's imports ranked second in the world, and are expected to grow at an average annual rate of 27 per cent in 2011-2015, outpacing export growth by five percentage points. As a result, the total value of imports is expected to exceed US$10 trillion in only two years, providing lucrative investment opportunities and broader markets to foreign investors.