Why China is putting the brakes on export-driven growth

Will higher salaries just mean inflated prices?

    Yes and no. The bulk of the wage inflation is coming from the labor-intensive manufacturing sector, where thin margins in certain subsectors of that industry (i.e. textile manufactures) warrant passing through higher costs. In those sub-sectors that can perhaps afford to absorb the hit to margins (auto manufacturers, CPU manufacturers, construction), inflation won't immediately take hold, if those sectors refrain from passing through price increases to consumers.

    The latest CPI reading in China is +3.1% over last year. A likely scenario is that this round of wage inflation is passed through to importers of Chinese goods, with the E.U. and the U.S. being the largest recipients (20% and 17%, respectively YTD through May).In other words, there will be some lag time before Chinese consumers have to worry about inflation hitting their newly fattened wallets.

    And keep in mind, China is a save-first economy, so 20-25% wage inflation doesn't instantly equal 20-25% more consumer spending. Some portion of that will be socked away for a rainy day. Even that may turn out to be a net positive for the Chinese economy: The last 12-18 months have seen a huge growth in loans as the middle class has struggled to keep up with soaring real estate prices. With more money in their pockets to service that debt and recapitalize lenders, China may avoid walking into the credit bubble trap that nearly felled the U.S. economy two years ago.