Baidu.com, Inc. (ADR) (BIDU): Why China’s Surging Economy Is in Trouble

Granted, consumer spending is predicted to grow substantially in China as the middle class rises. Signs have already emerged of growing consumption. Retail sales jumped more than 12% year over year in January and February, and Chinese consumption has plenty of room to grow: It currently makes up about 37% of GDP — far less than in economies such as the U.S. Still, Chinese middle-class consumers face high prices for many goods, and the era of “Made in China” cheap goods is coming to an end, further threatening consumer spending power as the middle class struggles to take hold.

Cheap manufacturing screeches to a halt
China’s low-wage manufacturing has lured many companies to invest in the nation, but the country’s poorer neighbors have taken note. Developing economies such as Cambodia and Vietnam are drawing cheap manufacturing away from China as wages rise in the world’s second-largest economy. Corporate investment from Chinese and Japanese firms has flowed into newfound wealth in Southeast Asia’s smaller economies, with $850 million entering Cambodia alone in 2011. That’s a critical problem for China, which has long used its advantages in trade and investments to buoy its growth.

Once again, the problem of the middle class’s rise rears its head. Labor costs and worker demands at Chinese plants — made famous by Foxconn’s worker troubles — will continue to drive away cheap manufacturing as the middle class swells and more Chinese citizens demand fair working conditions. China’s neighbors will benefit, but Chinese prices and imports are likely to rise as manufacturing flees for greener pastures.

Chinese labor and manufacturing have grown so pricey that even advanced economies could benefit from China’s loss. The Boston Consulting Group in 2011 estimated that wages and benefits would grow at a rate between 15% and 20% a year — a hike that could even send manufacturing back to the United States in a twist of the historical “Made in China” trend. Once again, Chinese exports could be poised to fall just when Beijing needs them to support the growing middle class and urban population.