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China's economy recovering but torrid growth over

Associated Press Published: November 19, 2012

Already, retail spending is rising faster than overall growth as wages climb. In October, retail sales were up 14.5 percent over a year earlier.

In Huzhou, a city south of Shanghai in Zhejiang province, business is strong for entrepreneur's Li Yong bedding factory. It employs 10 people and doesn't bother to export because demand from Chinese customers is strong. Costs for labor, rent and materials up but so are sales.

"Our profits are up 10 percent this year from last year," Li said.

Li buys all his materials in China, highlighting another trend that could blunt the payoff for its trading partners. As local companies develop the ability to deliver more sophisticated goods and services, they are serving Chinese consumers from domestic resources, limiting demand for imported materials and technology.

"I will think about using imported materials in the future, but for now, both the customers and I cannot afford it," Li said.

China's slowdown was due largely to government controls imposed to cool an overheated economy and inflation following its quick, stimulus-fueled rebound from the 2008 crisis.

At the same time, steelmakers and other heavy industry was under pressure from a government campaign to cut pollution and energy use by closing older facilities. Construction, a major source of jobs, was battered by a clampdown on land sales and building cool surging housing prices and stop speculation-driven investment.

Easing building curbs would be a quick way to generate jobs, but communist leaders resisted pleas from developers even as growth drifted lower, worried about setting back their rebalancing plans. Instead, the government is pushing companies to construct more low-cost housing, which the general public needs but that produces less profit and requires less imported steel for girders and copper for wiring.

Weaker manufacturing and construction activity already have cut China's demand for foreign goods. Imports of steel products fell 39.9 percent in October from a year earlier. Copper imports were off 12.2 percent and those of raw wood were down 11.1 percent.

Government pressure to raise wages has put more money in consumers' pockets but is squeezing companies, especially in labor-intensive industries that employ millions of people making shoes, toys and other low-tech goods.

Chen Shuhai's 5-year-old wig factory is the sort of labor-intensive business that is being pushed out of China by higher costs.

Rent on his factory in Yiwu, a southern city famous for exporting buttons and other low-tech goods, doubled from 2009 to 2011. Monthly wages are up 10 percent this year to about 3,500 yuan ($550) for each of his 80 employees.

Chen said neighboring companies that exported to debt-crippled Europe have closed. Others are moving to Vietnam, India and other lower-wage markets.

"There is not much room left in China for the wig industry," Chen said. "I don't know what will happen to my factory."

Longer-term, the government's effort to create a consumer-driven economy might turn China into a market for tourism, insurance, health care and other service companies.

"The issue is whether it can do this smoothly, in which case growth can remain strong," said Williams. If it works, "over the next 10 years, it will be another group of economies that are able to ride China's coattails."


AP researcher Fu Ting in Shanghai contributed.