In 7 years, the China's story is over
Fears in China rise as country hits "Lewis Point"
Chinas vast reserve of cheap workers in the hinterland is vanishing at a vertiginous pace.
Another seven years or so - enough to buoy global coal, crude, and copper prices for a while - but then it will all be over the demographic dividend will be exhausted. Beijing revealed last week that the countrys working age population has already begun to shrink, sooner than expected. It will soon go into precipitous decline, according to the International Monetary Fund.
Japan hit this inflexion point fourteen years ago, but by then it was already rich, with $3 trillion of net savings overseas. China has hit the wall a quarter century earlier in its development path.
The ageing crisis is well-known. It is already six years since a Chinese demographer shocked Davos with a warning that his country might have to resort to mass suicide in the end, shoving pensioners onto the ice.
Less known is the parallel - and linked - labour drain in the countryside. A new IMF paper - Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point? - says the reserve army of peasants looking for work peaked in 2010 at around 150 million. The numbers are now collapsing.
The surplus will disappear soon after 2020. A decade after that China will face a labour shortage of almost 140 million workers, surely the greatest jobs crunch ever seen. This will have far-reaching implications for both China and the rest of the world, said the IMF.
There is little Beijing can do to head off the shock. The effects of low fertility rates - and the one child policy - are already baked into the pie. It would take half a century to turn around the demographic supertanker.
The Lewis Point, named after St Lucias Nobel economist Arthur Lewis, is when the supply of workers dries up and city wages soar. It is when labour turns the tables on capital, and profits crash.
You could argue that such a process already well under way, and is why Chinese equities are trading at a third of their 2007 peak in real terms. Manufacturing pay has risen 16% a year over the last decade in the East Coast hubs of Shenzhen, Beijing, Shanghai and Tianjin, though this slowed sharply in 2012.
Boston Consulting Group says that productivity-adjusted wages were just 22% of US levels as recently as 2005. They will reach 43% by 2015, or 61% for the American South.
It is a key reason why General Electric, Ford, Caterpillar and others are re-shoring from China back to the US, though cheap shale gas, a weaker dollar, and shipping costs all play their part.
This is no bad thing. The world economy is rebalancing. Chinas current account surplus has fallen from 10% of GDP to just 2.5%.
The Lewis Point is the great test for catch-up economies, when they can no longer rely on cheap labour, copied technology, and export-led growth to keep the game going.
George Magnus from UBS said investment made up 55% of all growth in 2012, and will soon have to reach 60% to keep up the pace. It is becoming unhinged, a sort of Ponzi scheme.
The boom is rotating, of course, which makes it harder to read. The epicentre is moving west, deep into the Upper Yangtze and heartland regions holding 700 million people.
The Sichuan capital of Chengdu is completing the worlds biggest building, a glass and steel pagoda. This will soon be eclipsed for sheer chutzpah by the worlds tallest tower in Changsha, to be erected in three months flat.
The balance sheets of Chinas banks have been growing by over 30% of GDP a year since the Lehman crisis and are still growing at a 20%, wildly exceeding the safe speed limit.
Fitch Ratings said fresh credit added to the Chinese economy over the last four years has reached $14 trillion, if you include shadow banking, trusts, letters of credit and offshore vehicles. This extra blast of loan stimulus is roughly equal to the entire US commercial banking system.
The law of diminishing returns is setting in. The output generated by each extra yuan of lending has fallen from 0.8 to 0.35, according to Fitch.
Magnus said credit has reached 210% of GDP - far higher than other developing countries - and only half of new loans are plain vanilla under the full control of regulators.
How and when this will end is anybodys guess. He fears a Minsky Moment when the investment bubble pops, as such bubbles always do.
My guess is that there is one last cycle of Chinese fever to enjoy -- if that is right word -- before the ageing crunch and the credit hangover combine with toxic effect.
One thing is for sure: a middle-income country with a shrinking work force is not about to displace the United States as global hegemon.
Daily Telegraph
Fears in China rise as country hits "Lewis Point"
Chinas vast reserve of cheap workers in the hinterland is vanishing at a vertiginous pace.
Another seven years or so - enough to buoy global coal, crude, and copper prices for a while - but then it will all be over the demographic dividend will be exhausted. Beijing revealed last week that the countrys working age population has already begun to shrink, sooner than expected. It will soon go into precipitous decline, according to the International Monetary Fund.
Japan hit this inflexion point fourteen years ago, but by then it was already rich, with $3 trillion of net savings overseas. China has hit the wall a quarter century earlier in its development path.
The ageing crisis is well-known. It is already six years since a Chinese demographer shocked Davos with a warning that his country might have to resort to mass suicide in the end, shoving pensioners onto the ice.
Less known is the parallel - and linked - labour drain in the countryside. A new IMF paper - Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point? - says the reserve army of peasants looking for work peaked in 2010 at around 150 million. The numbers are now collapsing.
The surplus will disappear soon after 2020. A decade after that China will face a labour shortage of almost 140 million workers, surely the greatest jobs crunch ever seen. This will have far-reaching implications for both China and the rest of the world, said the IMF.
There is little Beijing can do to head off the shock. The effects of low fertility rates - and the one child policy - are already baked into the pie. It would take half a century to turn around the demographic supertanker.
The Lewis Point, named after St Lucias Nobel economist Arthur Lewis, is when the supply of workers dries up and city wages soar. It is when labour turns the tables on capital, and profits crash.
You could argue that such a process already well under way, and is why Chinese equities are trading at a third of their 2007 peak in real terms. Manufacturing pay has risen 16% a year over the last decade in the East Coast hubs of Shenzhen, Beijing, Shanghai and Tianjin, though this slowed sharply in 2012.
Boston Consulting Group says that productivity-adjusted wages were just 22% of US levels as recently as 2005. They will reach 43% by 2015, or 61% for the American South.
It is a key reason why General Electric, Ford, Caterpillar and others are re-shoring from China back to the US, though cheap shale gas, a weaker dollar, and shipping costs all play their part.
This is no bad thing. The world economy is rebalancing. Chinas current account surplus has fallen from 10% of GDP to just 2.5%.
The Lewis Point is the great test for catch-up economies, when they can no longer rely on cheap labour, copied technology, and export-led growth to keep the game going.
George Magnus from UBS said investment made up 55% of all growth in 2012, and will soon have to reach 60% to keep up the pace. It is becoming unhinged, a sort of Ponzi scheme.
The boom is rotating, of course, which makes it harder to read. The epicentre is moving west, deep into the Upper Yangtze and heartland regions holding 700 million people.
The Sichuan capital of Chengdu is completing the worlds biggest building, a glass and steel pagoda. This will soon be eclipsed for sheer chutzpah by the worlds tallest tower in Changsha, to be erected in three months flat.
The balance sheets of Chinas banks have been growing by over 30% of GDP a year since the Lehman crisis and are still growing at a 20%, wildly exceeding the safe speed limit.
Fitch Ratings said fresh credit added to the Chinese economy over the last four years has reached $14 trillion, if you include shadow banking, trusts, letters of credit and offshore vehicles. This extra blast of loan stimulus is roughly equal to the entire US commercial banking system.
The law of diminishing returns is setting in. The output generated by each extra yuan of lending has fallen from 0.8 to 0.35, according to Fitch.
Magnus said credit has reached 210% of GDP - far higher than other developing countries - and only half of new loans are plain vanilla under the full control of regulators.
How and when this will end is anybodys guess. He fears a Minsky Moment when the investment bubble pops, as such bubbles always do.
My guess is that there is one last cycle of Chinese fever to enjoy -- if that is right word -- before the ageing crunch and the credit hangover combine with toxic effect.
One thing is for sure: a middle-income country with a shrinking work force is not about to displace the United States as global hegemon.
Daily Telegraph
