In the early stages of growth, economies like that of China, can grow with remarkable speed by applying well established technologies and capital to seemingly unlimited supplies of labour without substantial pressure on wage costs. There comes a turning point, as Arthur Lewis called it, when that phase of development comes to an end and long term wage pressures come to dominate the way the economy works. This may take a while in a large economy like that of China —hence Garnaut’s talk of a ‘turning period’ rather than a ‘turning point’ — but once the process starts there are big ramifications for everything about the way in which the economy works and how it is managed at home and abroad. The work on the Chinese economy organised around the ANU’s China Update every year provides more and more confident evidence that China’s turning point is under way.

Garnaut highlights four major implications.

First, we’ll see large and continuing increases in real wages and in the wage share of income. The rise in the wage share of income will also be reflected in a growing share of consumption in expenditure and a reduction in the national savings rate.

Second, China’s savings rate is likely to fall more than its investment rate and therefore cut the trade and current account surplus. This will ease US and international pressures over payments imbalances and exchange rates. The impact effect might alleviate balance of payments problems for America but the complication is that reduced Chinese surpluses will cut the supply of international savings, thereby put upward pressure on interest rates and require the United States to get serious about balancing its domestic expenditures and public debt.

Third, China will shift its trade competitiveness away from labour-intensive goods to a whole range of new, more diverse goods that use more capital and technology to produce. So the nature of Chinese competition in the international market will change significantly.

Fourth, although they might try, the Chinese authorities will ultimately be unable to resist substantial appreciation of the currency, a development that will ameliorate growing inequalities as well as macro-economic policy management in China. In the process, labour and other factors will become more productive.

Garnaut concludes that whether or not China succeeds in maintaining the high aggregate rates of economic growth it has enjoyed so far until it reaches the frontiers of the world economy, most of us will be surprised by how quickly China catches up with industrial countries now that we are at this turning point. China’s real exchange rate will rise rapidly — whether that occurs through inflation, nominal exchange rate appreciation or a combination of the two. The value of China’s output when measured in the national accounts and converted into international currency at current exchange rates, he says, will converge towards the much higher ‘purchasing power’ estimates of GDP. People in China and abroad who focus on conventional measures of national output will find that China catches up with the world’s most productive economies in output per person — and with the United States in total output — much more quickly than they had been expecting from extrapolation of differentials in national growth rates.

And that’s another challenge altogether for the political psychology of managing the adjustment in the rest of the world to China’s rising economic power.