China slowdown can be 'positive' for Aust

CHINA'S growth is slowing but Australia has much to gain from its growing middle class, a prominent American economist says.

China economy Shanghai tower

BELIEVE it or not, a slowdown in China can be good news for Australia.

While Chinese demand for Australian commodities is slowing, non-mining sectors like manufacturing stand to cash in on China's growing wealth, says Bob Baur, chief global economist at Principal Global Investors.

Its expanding middle class, already 300 million strong, has created a new consumer market for developed nations to tap into.

"We think China will never see double digit growth again, thus demand for commodities, which is key for the Australian economy, is slowing fairly substantially," Dr Baur told AAP.

"The upside of that is that their increasing household wealth gives them the wherewithal to buy things from developed countries that they weren't able to buy before.

"That creates a large group of consumers that can buy the kinds of things that Australia has to offer, whether it be entertainment, technology, financial products, tourism, education.

"Australia has to figure out how to serve that market."

After two decades of tremendous growth in China, the global economy is rebalancing, Dr Baur said.

China's one child policy means its labour force is shrinking while the huge productivity gains from moving its underemployed farm workers into factories have largely been exhausted.

"When you have a farm worker that's working part time with his hands and you move him into a factory with machinery, the value of their output increases dramatically but when that transition has already been made with a large part of their population, those huge gains are going to be a lot slower to come," Dr Baur said.

And as China's wealth grows, so does the cost of doing business there.

Wages have grown, China's currency has appreciated and oil prices have increased 10-fold since the 1990s.

The world's second largest economy is losing its cost competitiveness and manufacturing is once again returning to the US, Dr Baur said.

It could return to Australia, too, as long as the Australian dollar keeps falling.

Dr Baur says companies such as Foxconn, Airbus, Michelin, Volkswagen, Toyota and Caterpillar are now expanding their manufacturing operations in the US.

When China's cost competitiveness boomed in the 1990s, the US lost one third, about six million, of its manufacturing jobs.

While the job losses were horrendous, it allowed 300 million consumers to buy goods from China at much cheaper prices, Dr Baur said.

"By buying those goods, one could say the US was almost investing in China and that investment is now paying off because it turned into a rising middle class of people who are interested in seeing Sandra Bullock in Gravity or Tiger Woods on the golf course," he said.

"Somebody living on $2 a day is not going to care about Tiger Woods or Sandra Bullock."