China’s Export Economy Begins Turning Inward

From the New York Times:

For years, Chinese leaders looked to the millions of poor workers from the country’s interior as the engine of a roaring export economy. They would move to coastal provinces, toil in factories and churn out the world’s household goods.

These days, the workers are crucial for China’s economy in another way: They must start buying the very products they manufacture, spending their paychecks on lipstick and lingerie, plastic lawn chairs and plasma television sets. Officials see them as the linchpin of China’s move away from a lopsided economic model that relies too heavily on foreign consumption.

Some of China’s top leaders, including Prime Minister Wen Jiabao, have emphasized the need for that restructuring for years, especially since the global financial crisis pummeled the export industry. But China’s move this week to make its currency, the renminbi, more flexible and the authorities’ apparent tolerance of recent factory strikes that have led to significant wage increases both signal that Chinese leaders could be serious about re-engineering the nation’s economic model.

The currency shift brings immediate political benefits, since China will now presumably come under less pressure at the Group of 20 summit meeting this weekend. But there are important domestic considerations as well. The breaking of the renminbi’s de facto peg to the dollar means the currency is likely to appreciate in value, making Chinese exports somewhat less competitive in the global marketplace but strengthening the purchasing power of Chinese consumers. Likewise, government policies to encourage wage increases for poor laborers — there are an estimated 150 million migrant workers in cities — could also spur consumption, if the pay increases outpace inflation.

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