Slowdown reflects rebalance

GaveKal-Dragonomics, an independent research and advisory firm specializing in China's economy, explains China's growth this way: "As it has modernized its economy, China has experienced a virtual 'tsunami' of labor. Much of this has consisted of young Chinese women between 18 and 22, with not much bargaining power. As a result, China, for a long time could run its economy at double digit rates of growth, with little pressure on wage and price inflation or the exchange rate."

This was not surprising given that after reform and opening-up a seemingly endless supply of unskilled migrants from rural areas flocked to the big cities and the new industrial zones in search of a factory job that promised a better future than farming.

However, China's demographic dividend is coming to an end and the tightening labor market means the authorities will in all likelihood have to consider a higher exchange rate or higher inflation, as China shifts from its reliance on export-led development to consumption-led growth.