Friday, 4 January 2008

Are There Enough People In China?

Depending upon how you view it, and how you count the numbers, China contains between a quarter and a third of humanity. And yet, one can ask if there are enough people in China to continue driving the Chinese economy at the pace of recent years. In a recent article in ‘The World In 2008’ (see article) The Economist asks precisely this question.

It would appear that the labour market in China is tightening. The tightening is coming from three areas: development (it is easier to poach trained staff than to train them), demographics (the ‘one child policy’ is starting to drain the youth end of the talent pool), and skills shortages (many point to the inadequacies of the vocational system in China). In addition to this, Government policy is distorting the market. By promoting development in the rural heartland, the flow of cheap, unskilled labour to the coastal provinces is starting to abate.

The tightening of the labour market is partly offset by returning Chinese from overseas, but the immigration inflows are insufficient to ease the general labour scarcity. The result of all of this is that wages are starting to rise in China, along with staff turnover. It is stated that factory wages in China are starting to become comparable to Malaysia. However, it is in the managerial and supervisory grades that the shortages are felt most acutely. It would seem that managerial salaries in China are starting to creep up to European levels.

From a futures perspective, this story has a number of points to commend it. If we were asked the identity of China’s China five years ago, we would have guessed at Vietnam. More recently, we would have thought about Africa. It seems that many Chinese have been thinking Malaysia. It is almost as if the Chinese development story is about to write a Malaysian chapter. This is one to watch in the future.

For some time, we have been bullish about China in the short term, but bearish about China in the longer term. At some point in time, we need to cross from optimist to pessimism over the Chinese economy. A tightening labour market is just one of those signals that warns of impending change. In our model, growth is tied to the abundance of cheap labour. If that source dries up – as we expect it to in the near future – then we do question the ability of the Chinese economy to continue growing at about 10% per annum. However, a growth rate appreciably less than 10% per annum may well trigger the political instability that has not been evident in China in recent years.

It is quite easy to talk ourselves into a dark scenario – especially if we add banking instability to the mix. However, it is probably the case that the shine will come off the Chinese economy in the next three to five years as the demographic factors start to take hold. One might wonder what that will mean for those western companies who have invested in China in the expectation of returns over a longer period than that.

Perhaps the next crisis after the current sub-prime crisis will be one involving asset write offs in China?

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