????Growth in China is going to slow. After the country posted 11.9% growth in the GDP for the first quarter of this year compared to last, there's really no other option. For one, the sovereign debt scare in Europe, which has eroded the purchasing power of China's largest export market, will be a big knock on the economy. The Chinese government has even set their full year growth estimate at 9.1%, explicitly implying a slow down is coming. And, with the Shanghai Composite down 26.5% year to date, Chinese equity prices confirm this.

????Savvy investors are realizing that China's growth remains attractive because Beijing is battening the hatches by turning to a new group of consumers: their own citizens. Over the past several weeks, China has taken a number of steps to increase its citizenry's purchasing power -- none arriving with more fanfare than the de-pegging of the yuan.

????Despite the prospects of a stronger currency, the People's Bank of China still mandates that the yuan only fluctuates 0.5% from the daily official rate. As a result, the yuan's appreciation might not be the silver bullet China is looking for to stimulate domestic consumption. Domestic consumption has actually fallen over time until a small recent rebound, as the chart above shows. As a share of GDP, personal income has had an even more dramatic decline: 53% in 1999 down to just 39.7% in 2009.

????That said, there have been a number of positive developments regarding wage growth and government stimulus that will help move China forward towards a more consumption-oriented economy, rather than one that has been fueled by manufacturing and exports in recent years. Here's an incomplete list:

????Wages: In April, Shanghai raised minimum wages 17% to 1,120 yuan per month. Guangdong (China's largest export base) raised minimum wages in five locales within the province by an average of 21%.

????Cash for clunky ovens: On June 3rd, China extended its home appliance trade-in program until 2011. Sales of such appliances have reached 54 billion yuan and 5 billion yuan of subsidies were handed out since the start of the program.

????Job growth: On June 8th, a survey indicated that Chinese employers' hiring plans reached a six-year high.

????More jobs: On June 11th, the IMF reported that the surplus of rural workers for labor-intensive work has fallen to about 25 million from roughly 120 million in 2007, which is bullish for wages in that sector (less supply). Conversely, research from China International Capital Corp. that suggests that 31 million Chinese will return to the labor market in 2011 after the completion of projects resulting from the government's 4 trillion yuan stimulus package. Net-net: supply of labor-intensive workers is still shrinking but perhaps at a slower rate, which is net bullish for wages.

????More wages: On July 1st, Bejing increased monthly minimum wages by 20% to 960 yuan. In a similar fashion, Henan (China's most populous province) raised its minimum wage by 33% to 600 yuan per month.

Rising wages to empower the Chinese consumer

????All told, more than 20 provinces and municipalities plan to increase minimum wages this year, according to the Ministry of Human Resources and Social Security. As a result, we should begin to see evidence of accelerating domestic consumption in the coming months. Furthermore, companies that are positioned to service the Chinese local economy (i.e. domestic retailers and savings deposit institutions) will see an added kick from this wave of wage inflation.

????In short, while China built its impressive industries on the back the global economic boom of the past twenty years, it's now figuring out how to sustain them by turning its citizens into better consumers.