Shortage of workers to halt China's growth
The country will face a shortage of 140 million workers by 2030 and it's too late to do much about it, writes Ambrose Evans-Pritchard.
We can now discern more or less when the catch-up growth miracle will sputter out. Another seven years or so - enough to buoy global coal, crude, and copper prices for a while - but then it will all be over. China's demographic dividend will be exhausted.
Beijing revealed last week the country's working-age population has already begun to shrink, sooner than expected. It will soon go into "precipitous decline", according to the International Monetary Fund.
Japan hit this inflexion point 14 years ago, but by then it was already rich, with $US3 trillion ($2.9 trillion) of net savings overseas. China has hit the wall a quarter of a century earlier in its development path.
The ageing crisis is well known. It is already six years since a Chinese demographer shocked Davos with a warning his country might have to resort to mass suicide in the end, shoving pensioners on to the ice.
Less known is the parallel labour drain in the countryside. A new IMF paper - Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point? - says the reserve army of peasants looking for work peaked in 2010 around 150 million. The numbers are now collapsing.
The surplus will disappear soon after 2020. A decade after that China will face a labour shortage of almost 140 million workers, surely the greatest jobs crunch ever seen. "This will have far-reaching implications for both China and the rest of the world," the IMF said.
These farm workers are the footloose migrants who pour into the cities from the interior, the raw material of China's manufacturing workshops. They are carefully regulated by the semi-feudal Hukuo system to keep their families tied to villages at home, and to keep the lid on social revolt.
There is little Beijing can do to head off the shock. The effects of low fertility rates, and the one-child policy, are already baked into the pie. It would take half a century to turn around the demographic supertanker.
The Lewis Point, named after St Lucia's Nobel economist Sir Arthur Lewis, is when the supply of workers dries up and city wages soar. It is when labour turns the tables on capital, and profits crash.
You could argue such a process is already well under way, and is why Chinese equities are trading at a third of their 2007 peak in real terms. Manufacturing pay has risen 16 per cent a year in the past decade in the east-coast hubs of Shenzhen, Beijing, Shanghai and Tianjin, though this slowed sharply in 2012.
Boston Consulting Group says "productivity-adjusted wages" were just 22 per cent of US levels as recently as 2005. They will reach 43 per cent by 2015, or 61 per cent for the American south.
It is a key reason General Electric, Ford, Caterpillar and others are "re-shoring" from China back to the US, though cheap shale gas, a weaker dollar and shipping costs all play their part.
This is not a bad thing. The world economy is rebalancing. China's current account surplus has fallen from 10 per cent of GDP to just 2.5 per cent. China's corrosive gap between rich and poor should narrow.
Yet it is also a dangerous moment for Beijing. The Lewis Point is the great test for catch-up economies, when they can no longer rely on cheap labour, copied technology and export-led growth to keep the game going.
The air is thinner at the technology frontier. Success depends on such intangibles as the rule of law and the free flow of ideas. Those that fail to adapt in time slide into the "middle-income trap", and most do fail.
The Soviet Union failed. The Philippines - richer than Korea in the 1950s - failed. Most of the Middle East failed. So did most of Latin America in the 1960s and 1970s, and it is far from clear that Argentina and Brazil will break free this time.
We still do not know which way China is going to go under Xi Jinping. Vested interests, aligned with Maoist nostalgics, are putting up a formidable fight against reformers. It is worth reading an investigative series by Caixin showing how close hardliners came at different times to reversing Deng Xiaoping's free-market drive. Nothing is set in stone.
What we see so far is the Politburo has turned on the credit spigot again, and the reforms are mostly talk. Railway investment almost doubled in the second half of last year. The authorities at all levels have pledged stimulus worth $US2 trillion since the economy swooned last year. Some of it is a fictional wish-list, but some is real.
The shares of construction firms have surged since premier Li Keqiang uttered the magic words: "Unleashing urbanisation as the most important growth engine." Cynics suspect China's leaders are reverting to bad old ways: manic over-investment, more steel and concrete.
George Magnus from UBS said investment made up 55 per cent of all growth in 2012, and will soon have to reach 60 per cent to keep up the pace. It is becoming unhinged, a sort of Ponzi scheme.
The boom is rotating, of course, which makes it harder to read. The epicentre is moving west, deep into the Upper Yangtze and heartland regions holding 700 million people.
The Sichuan capital of Chengdu is completing the world's biggest building, a glass-and-steel pagoda. This will soon be eclipsed for sheer chutzpah by the world's tallest tower in Changsha, to be erected in three months flat.
Standard Chartered has just upgraded its China growth forecast to 8.3 per cent this year and 8.2 per cent next, and others are doing much the same.
They are probably right, but one watches this latest spree with a mixture of awe and alarm.
The balance sheets of China's banks have been growing by more than 30 per cent of GDP a year since the Lehman crisis and are still growing at 20 per cent, wildly exceeding the safe speed limit.
Fitch Ratings said fresh credit added to the Chinese economy over the past four years has reached $US14 trillion, if you include shadow banking, trusts, letters of credit and offshore vehicles. This blast of loan stimulus is roughly equal to the entire US commercial banking system.
The law of diminishing returns is setting in. The output generated by each extra yuan of lending has fallen from 0.8 to 0.35, according to Fitch.
Magnus said credit has reached 210 per cent of GDP - far higher than other developing countries - and only half of new loans are "plain vanilla" under the full control of regulators. How and when this will end is anybody's guess. He fears a "Minsky Moment" when the investment bubble pops, as such bubbles always do.
My guess is that there is one last cycle of Chinese fever to enjoy - if that is the right word - before the ageing crunch and the credit hangover combine with toxic effect. One thing is for sure: a middle-income country with a shrinking workforce is not about to displace the US as global hegemon.