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Mon Sep 01 13:24:16 SAST 2014

THE BIG READ: The great fall of China only a few years away

Ambrose Evans-Pritchard | 05 February, 2013 00:09
Migrant workers arriving in Beijing. By 2030, China will face a huge jobs crunch - it will be short of 140 million workers because of low fertility and the state's one-child policy Picture: LINTAO ZHANG/GETTY IMAGES

China's vast reserve of cheap workers in its hinterland is vanishing at a vertiginous pace. We can now discern more or less when the growth miracle will sputter out. Another seven years or so - enough to buoy coal, crude, and copper prices for now - and it will all be over. China's demographic dividend will be spent.

Beijing revealed last week that the country's 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 in 1998 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 by now well-known. It is already six years since a Chinese demographer shocked Davos with a warning that his country might eventually have to resort to mass suicide and shoving pensioners onto the ice.

Less known is the parallel - and linked - labour drain in the countryside.

A new International Monetary Fund paper - Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point? - says that the reserve army of peasants looking for work peaked in 2010 at 150million. The numbers are already collapsing.

The surplus will disappear soon after 2020.

A decade after that China will face a labour shortage of almost 140million workers, the greatest jobs crunch ever seen.

"This will have far-reaching implications for both China and the rest of the world," said the International Monetary Fund.

The farmworkers are the footloose migrants who pour into the cities from the interior, the raw material of China's workshops. They are regulated by the semi-feudal hukuo system, which keeps their families anchored in villages at home and keeps a lid on social revolt.

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. The Lewis Point, named after St Lucia's Nobel award-winning economist Sir 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 is already under way, and that's why Chinese equities are trading at a third of their 2007 peak in real terms. Manufacturing pay has risen 16% a year over the past decade in the east-coast cities.

Boston Consulting says "productivity-adjusted wages" were just 22% of US levels as recently as 2005. They will reach 43% by 2015.

This is the reason - along with cheap shale gas, a weaker dollar, and shipping costs - why General Electric, Ford, and Caterpillar are "re-shoring" back to the US.

It is no bad thing. The world economy is rebalancing. China's current account surplus has fallen from 10% of GDP to 2.5%.

The corrosive gap between rich and poor in China should narrow. The Gini coefficient, which measures inequality, should fall from its current stratospheric 0.61, according to Chengdu University.

It is a dangerous moment for China. 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.

We still do not know which way China will go under Xi Jinping, who will formally take over as president at the National People's Congress in March. Vested interests - aligned with Maoist nostalgics - are digging in against reformers. An investigative series just published by Caixin shows how close hardliners came to reversing Deng Xiaoping's free-market drive. Nothing is set in stone.

What we see so far is that the politburo has cranked up credit again, and reforms are mostly talk. Commissars at all levels have pledged stimulus worth $2-trillion since the economy swooned last year. Some of it is just wishful but some is real.

The shares of construction firms have surged since premier Li Keqiang uttered the magic words ". unleashing urbanisation as the most important growth engine".

Cynics suspect that China's leaders are reverting to the bad old ways: manic over-investment, and more steel and concrete.

Chengdu is completing the world's biggest building, a glass and steel pagoda.

This will soon be eclipsed for sheer chutzpah by the world's tallest tower, in Changsha, to be erected in three months flat.

One watches this latest spending spree with awe and alarm.

The balance sheets of China's banks have been growing by 30% of GDP a year since the Lehman crisis and they are still growing at 20%, far above the safe speed limit.

George Magnus, of Swiss global financial services company UBS, said Chinese credit has risen at 2.4 times the rate of economic growth since 2007. It has reached 210% of GDP - far higher than any other developing countries.

How and when this will end is anybody's guess. Magnus fears a "Minsky Moment" when the investment bubble pops.

My guess is that there is one last cycle of Chinese fever before the ageing crunch and the credit hangover combine with powerful effect.

One thing is for sure: a middle-income country with a shrinking workforce is not about to take over the world. - ©The Daily Telegraph

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