China Economy: 2012 and beyond (Part 1) – Demographics7 March, 2012, 16:32. Posted by Zarathustra
Tags: Demographics, Economy, Inflation, labour
This is part 2 of 5 in the series China Economy 2012 and Beyond
Population ageing, labour shortage and inflation
The rapid growth in the past, particularly in manufacturing, is in part due to the fact that there is a large reservoir of surplus labour in rural China, which was able to supply the labour demand in the industrialisation in urban China. Because of that, manufacturers were able to hire more labour as they expanded without having to raise wages significantly. When the surplus labour pool dries up. Beyond that point, wages have to rise, and corporate profit margins will fall.
One casual observation when one goes into more rural part China today points to a rapidly ageing population. As China urbanised, more and more people within the working-age population migrate from the rural China to cities to seek jobs in various sectors. This has been the source of surplus labour. However, one has to wonder, as one visits some of these rural places, if there are many people left who are willing to migrate to big cities and look for jobs, as most staying in these places are either old people or young children.
Census data as well as other forecasts have made the point that China is and will be rapidly ageing. According to UN population division, the proportion of working-age population to total population might have peaked in around 2015, if not earlier. Accordingly, dependency ratio would be rising rapidly from that point onwards. The bottom-line is that labour is no longer as abundant as it was 10 or 20 years ago. Not surprisingly, one should be expecting continuous upward pressure with respect to labour costs. As everyone else, we have already noticed the rapidly rising labour costs in China, which are causing troubles for some manufacturers. Of course, part of this is the increasing minimum wage requirements imposed by the government, which have been rising at double-digit rates for recent few years at least. On the other hand, this is also largely a demographic phenomenon, as described above, which government policies have very little to do with it in the short-term.
While it seems to be intuitive to say that the next step would be inflationary because working-age population relative to total population will decrease, which should drive wages higher (and it appears to be what most people would be expecting), thus prices, the reality, I suspect, is not going to be as intuitive as it seems.
The lesson from Japan
It is now very well-known that Japan’s economic boom ended in late 1980s and early 1990s, and the country subsequently drift into decade-long deflation, that even rounds of quantitative easing failed to generate much inflation, if any at all.
Interestingly, the late 1980s Japan was demographically at the same point as China is today. Its working-age population as a proportion of total population hit its peak in late 1980s, and in other words, dependency ratio increase since then.
Source: UN Population Division
The problems for Japan today is now almost universally understood as the burst of real estate and stock market bubble, which was built up on a mountain of debts, particularly in the corporate sector, which gave the banking sector huge non-performing loans problems. As a result of the burst of the bubble and the subsequent slowdown, despite the fact that working-age population peaked in late 1980s, which should, intuitively, increase labour costs, the rate of wages increases did not became faster, and indeed, wages started to fall. Likewise, consumer price inflation did not increase, and later turned into a deflation.
Source: Statistics Bureau of Japan
Here, the point is not to say definitively that the end of demographic dividend will inevitably lead to wages increasing at slow rates and/or wages decreasing. The point is to make it clear that the end of demographic dividend will not necessarily be inflationary. While demographics could be to blame for the ultimately deflationary outcome in Japan (and potentially in China), real estate bubbles and unsustainable debts should play more obvious roles in both cases. Unfortunately, one could find many parallels in terms of real estate bubble and debts in China.
Series: China Economy 2012 and Beyond
- China economy: 2012 and beyond
- China Economy: 2012 and beyond (Part 1) – Demographics
- China Economy: 2012 and beyond (Part 2) – Real Estate Bubble
- China Economy: 2012 and beyond (Part 3) – Debts
- China Economy: 2012 and beyond (Part 4) – Rebalancing The Economy