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Work and prosperity
4 April 2013

Watch out, China’s about to change the world economy – again

When something big changes the world in a short period of time we tend to think that it will continue to do so in the same way for a long period of time.

China, for instance, transformed the world economy by opening up a seemingly infinite supply of cheap labour and low cost manufacturing capacity. Western governments – and companies – are still struggling to keep pace with the remarkable economic changes that this has brought about.

However, as reported by Bloomberg, the Chinese challenge is evolving so fast that there’s a danger that the solutions we implement today will be to yesterday’s problems. For instance, the supply of Chinese workers is far from infinite:

  • “China’s pool of 15- to 39-year-olds, which supplies the bulk of workers for industry, construction and services, fell to 525 million last year, from 557 million five years earlier, according to data compiled by Bloomberg News from the U.S. Census Bureau’s international population database. The number employed in industry rose to 147 million from 117 million in the five years through September.”

As a result Chinese labour isn’t so cheap anymore:

  • “The gap between manufacturing costs in the U.S. and China has almost halved in the past eight years and will fall to 16 percent this year, according to Hackett Group Inc., a Miami- based consulting company.”

But what about inland China? Isn’t there a huge about of untapped capacity away from the coastal cities? Well, there was:

  • “The labor squeeze means wage costs inland are fast catching up with the industrial belt in the south and east. Average factory pay in Henan, about 800 kilometers (500 miles) from the coast, rose 110 percent in the past five years and gained 84 percent in Chongqing, 1,700 kilometers up the Yangtze River. 
  • “‘The wage differential between inland and coastal regions is down by more than half since 2006,’ said Jitendra Waral, a Bloomberg Industries analyst in Hong Kong.”

What’s more, the great Chinese labour squeeze is demographically programmed to continue:

  • “Pay pressures are set to intensify with the supply of young workers forecast to shrink by 20 million to 505 million by 2015 and a further 22 million by 2020.”

To some extent, manufacturing industry will adapt by shifting hi-tech production back to the industrialised world and lo-tech production to poorer Asian countries like Vietnam and Bangladesh.

This is good news for skilled workers in the west. However, if you take the combined working-age population of all the OECD nations, it still isn’t as much as China’s; and, furthermore, most of it is already gainfully employed in high value occupations.

As for the likes of Vietnam and Bangladesh, there are plenty of people waiting to step into factory jobs, but these countries aren’t as well-positioned as China was to rapidly develop the supporting infrastructure required for an explosive growth of manufacturing capacity.

In other words, a unique episode in world economic history is drawing to a close:

  • “Higher pay and the relocation of factories are undermining China’s three-decade export model that concentrated production, cheap labor, infrastructure and supply chains in one place, allowing savings that made it the world’s supplier of low-end goods.” 

According to Tao Dong, a senior economist at Credit Suisse Group AG in Hong Kong, this means one thing – inflation:

  • “The days of China as the anchor of global disinflation have ended... When global demand picks up, global inflation may arrive sooner rather than later.”


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