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Monday, March 22, 2010

Populous China heads toward labor shortage

Modernization's westward march, invisible hand leading economy toward higher productivity, lower growth: expert


Staff writer

C hina can't expect to sustain double-digit growth in the next decade because the abundant labor that supported its high-flying growth will not exist much longer, an expert on the Chinese economy said at a recent seminar.

In the years leading up to 2020, growth in China's gross domestic product will likely decline to an annual average of 8 percent, not the 9.8 percent it averaged over the past 30 years, said Kwan Chi Hung, senior fellow with the Nomura Institute of Capital Markets Research.

Kwan was speaking at a March 1 seminar organized by Keizai Koho Center on the theme, "The current state and future prospect of China's economy."

The global financial crisis has highlighted China's economic resilience, Kwan said. China's recovery from the September 2008 Lehman Brothers collapse is outpacing both advanced and emerging economies, and its growth hit a sizzling 10.7 percent in the fourth quarter, vaulting it past government projections to 8.7 percent for all of 2009.

The government promptly launched a 4 trillion yuan stimulus package after the crisis hit. Consumer spending remains strong and auto sales have shown a year-on-year increase of 80 to 90 percent in recent months, he said.

However, Kwan said China's consumer spending remains structurally weak in the sense that it still accounts for only 35 percent of GDP — or half that of the United States.

There are various explanations for why consumer spending remains weak in China. One is the lack of a social security system, a disadvantage some say tends to encourage saving rather than spending.

While each theory has as a grain of truth, something that can be quantitatively confirmed is the huge income gap between the rich and the poor, Kwan told the audience.

A regional comparison of per capita GDP reveals that a linear trend can be traced from the highest levels on the east coast to the lowest levels as one progresses west, he said. This trend clearly shows that workers in Shanghai are earning eight times more than their inland counterparts in Guizhou Province in the southwest, he said.

Another, more modern, economic explanation for the weak consumption suggests the expenditures of the rich are probably big in absolute terms but low in proportion to their incomes, whereas the less wealthy are compelled to use most of their income on living expenses, he said.

One way to boost consumption is to narrow this gap, Kwan said. Suggested policy steps for achieving this would include removing barriers to the free movement of people, goods and money through the country, transferring industries that are no longer competitive in the coastal areas to the inland regions, investing more in infrastructure for less-developed areas, and possibly redistributing tax revenue from wealthy urban areas to the inland regions, he said.

In fact, there are already signs that the gap has started to close, Kwan said.

Data shows that growth in the inland areas is outpacing the coastal areas — partly because export industries were hit hard by the global crisis and because inland areas are benefiting from the stimulus package, he said.

But even before the Lehman shock, fixed asset investment had been rising faster in the western regions since around 2004 — a trend that also began emerging in retail sales in 2007 — in line with the communist government's efforts to close the regional gap, he added.

Past patterns of economic development in other countries show that regional gaps tend to widen in the initial phase of development but start to shrink at some point due to market forces and government intervention, he said, noting that China may in fact have reached such a stage.

One reason behind the transition, Kwan said, is that China is rapidly heading toward a labor shortage.

Some of the urban areas on the coastline are shifting away from labor-intensive industries because the scarce availability of workers is pushing up wages, he said.

Despite its 1.3 billion-strong population, Kwan said he is "certain" that China's labor surplus will become a shortage "in a very short period" as the tightening of the government's "one-child policy" in the 1980s starts to take its toll.

That policy gradually boosted the proportion of working age people to the entire population — an abundant labor pool that supported China's nearly double-digit growth for 30 years from the supply side, Kwan said.

However, this cannot continue indefinitely, and this year will in fact be a turning point where the 15-to-59 age group is forecast to decline in proportion to the entire population, he said. The working-age population is expected to start falling in absolute terms in 2015, he said.

What does all this all mean? The negative implication, Kwan said, is that a smaller working population — and the subsequent decline in savings available to finance domestic investment — will spell an end to China's current growth model and double-digit growth. In other words, China will need to change from growth based on massive labor and capital supply, to growth based on increased productivity and higher-value industries, he predicted.

A frequent argument made by many China watchers is that a labor surplus of about 150 million people still exists in rural farming areas and that it will take at least 15 years for the industrial and service sectors to absorb them. But this is actually a thing of the past, Kwan said. In fact, more than 100 million farm workers have already moved to cities in the past 30 years, he said.

Back in the old days, China's worker surplus ensured that wages would not keep pace with national growth. But since China's GDP growth has been outpaced by the rise in real wages over the past 10 years, this is an indication that China is clearly moving from a labor surplus toward a labor shortage, Kwan said.



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