How often have you seen headlines like “Copper rises on strong Chinese growth” and China’s industrial profits rise the most in four years on commodity prices“?
Apparently, a mutually supportive cycle of strong growth fuels rising commodity prices, and rising prices fuels strong growth.
But recently we have seen a softening in commodity prices and often the reverse explanation has been cited (e.g., “Chinese demand concerns hit metals and related stocks“).
That relentless growth machine that has been China for the last two decades is finally showing signs of distress and, ironically enough, it is not the failure of the country’s long-term, export-led growth model that is to blame; according to The New York Times, it is domestic consumption that is slowing.
I say “ironically” because Beijing has been moving heaven and earth to refocus the economy from export-led growth to domestic consumption. This is in part because they could see the writing was on the wall regarding growing international resistance to China’s mercantilist trading approach. It’s also partly because it was fueling massive and often inefficient or wasteful investment in the country’s industrial sector and because environmentally heavy industry is a much more polluting source of GDP growth than consumption.
For those and other reasons, steering the economy toward meeting domestic consumption was a logical step in the maturation of the economy. Unfortunately, domestic house cost inflation, poor wage growth, an aging economy and trade wars are significantly depressing demand.
According to The New York Times, China is experiencing a “consumption downgrade,” as a generation of young Chinese, struggling with the high cost of property and slowing wage growth, downgrade their lifestyle expectations and spending. A blogger’s headline captured the mood, saying “This Generation of Young Chinese, Brace for the Bitter Days Ahead,” the paper reports.
As the article observes, China has played a major role in global growth. Chinese consumers help fuel growth at global companies like Apple, General Motors, Volkswagen and many others.
Yet retail sales this year have grown at their slowest pace in more than a decade. Wages in the private sector are growing at their slowest pace since the global financial crisis. The stock market has fallen by one-fifth.
In the longer term, consumers’ worries about the cost of living are postponing their decisions to have children, the article states, to the point they decide to remain childless for life. Generally, in developing countries this would not be an issue. Uniquely, China has a precarious demographic following decades of the one-child policy, which has resulted in a shrinking workforce that has been masked by a mass migration of peasant workers to the cities, but has now been largely played out.
Although the one-child policy was relaxed in 2013 to allow two children per couple, the change came about in a period when the high cost of living was pushing in the opposite direction, much as families in Europe and parts of North America, many elected to only have one or even no children.
China faces a demographic time bomb, according to Business Insider, as its aging population meets a dearth of new entrants into the job market.
With no state-supported social security or retirement safety nets, young workers have to save more, after high accommodation costs stretching budgets and dissuading the spending that had been a feature of a more rapidly growing wage economy just 5-10 years ago.
If consumption doesn’t spur GDP growth and the export model suffers from rising protectionism, then metal prices will face a future without the customary support of robust Chinese GDP growth to spur investor confidence.