China, Inflation and Demographics Concerns Collide – Part Two

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The second issue is both a short- and long-term problem, and relates to China’s demographics and changing attitudes. An article by Malcolm Moore in Shanghai explains how each year, fewer young workers are coming into the workforce as China’s population ages. According to his calculations, only 154 million people under 30 were part of China’s 550 million-strong industrial workforce. It had been expected that the agricultural center would migrate to the industrial coastal regions for another 10 to 20 years providing an ongoing pool of cheap labor, but the reality seems to be that as a) the number of youngsters falls and b) those left after earlier moves are less willing to migrate, the pool is dwindling faster than expected. Add to this the ambition of young and increasingly better-informed Chinese youngsters to pursue higher education and aspire to better-paid office jobs. The net effect is rising wages — anecdotal evidence we have seen firsthand in our own Chinese office. Zhang Zheng, an economist at Peking University, estimates wages have risen by 15-40 percent in some areas, pricing China out of low-cost, manually intensive markets. For a while, massive investment in mechanization and automation will counter this trend, but widespread reports of rising real wages are testament to the pressure building in the economy.

As a result of the above, plus possibly a contribution from a gradually strengthening currency, China’s annual surplus is expected to narrow over the coming year. UBS estimates the surplus will be about $150 billion, down a fifth on last year and the third straight year of decline. If that was not enough, the potential long-term savior of the Chinese — guiding the economy towards more domestic consumption and relying less on exports — seems if anything further away. The percentage of the economy accounted for by consumer spending has fallen to about 35 percent, only half that of the US. The WSJ reported on Sunday that China registered its first quarterly trade deficit in seven years, underlining the impact multiple dynamics are having on the economy.

The result could be a difficult couple of years for China as some parts of the economy continue to grow strongly and others, notably exporters, are hit harder. Beijing’s reaction to continuing inflation and rest assured it isn’t going away soon will have ripples far beyond the South China Sea as the measures they bring in impact perceptions of future demand for metals from the world’s biggest consumer.

–Stuart Burns

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