What jumped out at me in the latest quarterly from the World Bank’s Beijing office?

First, the data showing that labor income is falling as a share of Chinese GDP.    Moreover, its fall seems to have accelerated recently, just after the Chinese government started talking about the need to rebalance the economy.   See Figure 9 on p. 7.   As the World Bank hints, it will be hard to shift the basis of Chinese growth toward consumption if labor income keeps falling as a share of GDP…

Second, the data on China’s processing trade, or perhaps, the beginning of the end of China’s processing trade.   Non-processing exports are now growing faster than processing exports.   And processing import growth didn’t keep up with processing export growth (See Figures 3 and 4).    As the World Bank notes in a footnote: 

“The import/ export ratio in processing started to decline in 2005, after years of broad stability.”

Why?  Most likely because more and more components are made in China. 

Stage one involves shifting final assembly to China.  But once the one-off cost savings from that shift have been realized, getting more cost savings requires shifting parts production.   Stage two consequently involves shifting component production to China.  

The development of an internal Chinese supply chain for its final assembly plants is, I suspect, a bit reason why China’s trade surplus has increased so dramatically recently.

Third, the World Bank’s forecast for China’s 2007 balance of payments.   The World Bank’s economists forecast a slowdown in export growth (maybe, but there isn’t yet much evidence that it is happening) will keep China’s current account surplus from increasing by all that much.  It rises from $230b in 2006 to $260b in 2007 (See Table 2 of the Quarterly).  Personally, I think China’s 07 surplus will be higher.    They also forecast continued net FDI inflows.