As available capital and labor pools shrink in China, local and foreign companies will be forced to transition from labor-intensive to value-added industries to sustain growth. Michael Kurtz discusses the two main trends that will affect the nature of economic activity and the financial markets in China over the next decade.
Demographic Change: with China's average age increasing and the size of its workforce likely peaking in the following three years and declining after that, major structural reform will be necessary to transition from labor intensive manufacturing to capital intensive and higher value-added sectors, driven by local consumption.
Capital Account Reform: Current capital account restrictions in China have caused a buildup of liquidity in the local economy. This drives down the cost of capital, which means borrowers do not need to generate high returns to repay their cost of capital. As China strives to internationalize its currency and financial markets, these restrictions will be relaxed, which means more capital would flow out of China, decreasing the supply for local borrowers, who would have to increase their capital efficiency to compete for a smaller and more expensive capital pool.