For the last 20 years China’s economy has relied heavily on exports to Western markets, such as the United States and European Union. Now, rapidly rising wages and a booming economy suggest that China may be on the verge of shifting from export driven growth to meeting consumer demand.

China

Through the course of 2012, private sector wages in China rose by a stunning 14 percent. This rapid growth in wages came even as economic growth moderated from 9.3 percent in 2011 to 7.8 percent in 2012. Perhaps even more importantly, wages have continued to rise and the economy grew rapidly even as exports declined.

This suggests that China may be decoupling from its dependency on Western markets. These rising wages are coming at a time when the Chinese government has brought inflation under control, watching it rise only 2.4 percent in April of 2013, and having hovered between 2 and 3 percent through the course of 2012.

When some people think of the United States and its golden age during the twentieth century, they often point to American military might as its ultimate manifestation of power. This would seem like an easy choice given the strength of the U.S. military and its global footprint. There is another valuable view, however, that it was the American domestic market, and access to that market, that was America’s greatest political asset.

Just look at China. They stood in face of American military might for decades, rarely blinking an eye. And yet when it came time to access the United State’s domestic market, the country quickly showed a willingness to change its economic policies, and more slowly, to liberalize its government. The Chinese rarely worried about a confrontation with the U.S. military, but they showed far more concern when it came to access to American domestic markets.

Some analysts are pointing out that the rapid rise in wages could undermine China’s supremacy in manufacturing. This is a highly relevant point and over time, China could lose ground to cheaper competitors, such as Cambodia and Vietnam. Still, with its massive infrastructure and the huge amount of money companies already have tied up in the country, China should still have a prosperous manufacturing sector for years to come.

Also, it is important to note that there are still hundreds of millions of people living in rural China who will be willing to work for lower wages. While the demands of these workers may increase, the increases should be manageable. Certainly some low end manufacturing will be lost to cheaper countries, but if managed properly this could actually help China scale up the value chain.

Further, as costs rise China may be able to gradually shift towards higher end manufacturing as time goes on. Germany, Singapore, and to a lesser extent, the United States, have been able to make this transition. With surging domestic demand, there is no reason to believe that China cannot do the same. Yes, there will be challenges going forward, but so far the Chinese government has shown itself to be adaptable and to have good reins on the economy.

China’s Biggest Challenge To The U.S.?

China’s biggest challenge to the United States won’t be on military terms, but instead on the basis of access to economic markets. And given increasing poverty and unemployment rates, which have massive detrimental impacts on domestic demand, China appears to be winning the war. While China still has a long ways to go before it can fully rival, or supplant, the United States, trends are pointing upwards. At the same time, trends in the U.S. are pointing downwards.

Now, as China’s domestic economy surges and consumer spending picks up, the nation could become the world’s economic engine for growth.