The nation faces challenges on the road ahead
By Mark Robertson,
investment manager, emerging market equities, Baillie Gifford
huge surplus of labour and rapid investment growth have given the
world a productivity windfall over the last 25 years, in the shape
of constantly falling prices of manufactured goods. The world has
perhaps become too accustomed to this benign influence, and over
the next twenty years some of these benefits may even be reversed.
Demographic and environmental issues are already putting upward
pressure on unit costs, which could herald a trend change in the
global pricing environment.
China’s One Child Policy has been in place for almost four
decades. It has been highly effective and China’s demographic
structure has already started to change dramatically. The number
of elderly Chinese is growing at an alarming rate, but perhaps more
worrying is the sharp contraction in the number of young people.
Current demographic estimates suggest the number of people under
40 could fall by almost a third over the next 20 years, and the
process is already well underway. Since these young, relatively
well educated and flexible workers supply the largest part of China’s
manufacturing army, their increasing scarcity is posing operational
problems for manufacturing companies. Their costs have been rising
for some time, and that has also begun to translate into rising
As China’s workforce stops expanding and ultimately starts
to shrink, we may have to get used to Chinese growth rates well
below what we’ve seen in the past. An increasingly well-educated
labour force can keep generating productivity gains, but harsh arithmetic
dictates that the aggregate growth rate will eventually fall. This
trend is likely to be reinforced by the aging process, as a greater
share of labour and resources will need to be devoted to supporting
the elderly. Also, as more Chinese retire, they will stop saving
and become net consumers, changing the structure of the economy.
A move away from investment towards greater consumption is generally
considered desirable at this stage of China’s development,
and is likely to happen as a result of the demographic shift as
much as any policy. As it does, China’s present vast trade
surpluses are likely to fall and latterly turn to deficits, which
in combination with rising budget deficits will turn China into
a net importer of capital, in stark contrast to its current role.
In addition to demographic change, another structural issue is beginning
to affect China’s international competitiveness: the environment.
One of the reasons the goods we buy from China are so much cheaper
than what we make at home is that the Chinese have tolerated environmental
degradation that would be quite unacceptable in other societies.
There are four environmental issues that have now become highly
political: extreme pollution, the rapacious exploitation of local
resources without regard to sustainability, health and safety deficiencies
that result in hundreds of thousands of industrial deaths, and the
arbitrary confiscation of agricultural land to be provided for industrial
use. The political tide has clearly turned, as the Communist Party
has recognized that these issues are now generating as much social
instability as its traditional concern, unemployment. As environmental
neglect becomes increasingly unacceptable, the process of upgrading
China’s factories to international standards, and of rectifying
past degradation, will also inevitably add another layer of costs
to the manufacturing process.
China’s role as workshop of the world has been acquired due
to some unique circumstances, but we should be careful not to assume
those will last indefinitely. Its days as the originator of global
disinflation could possibly be numbered.
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