China is transitioning into a labor shortage economy, having been a labor surplus economy since at least 1991. What the authors of the paper highlighted this week, Mitali Das and Papa N’Diaye from the IMF, demonstrate is there’s no way out of what’s coming soon to a massive economy near you.
Growth in the working age population of China will come to an end sometime between 2020 and 2025. The core working age population i.e. those aged between 20~39 peaked in 2010 and, as the authors put it, this change is ‘..large, irreversible and inevitable.’
To drive their point home they model some alternative scenarios to see what can be done. Reform the hukou system to allow for more to come off the land, increase fertility by officially abandoning the 1-child policy, increase agricultural productivity freeing up surplus labor or how about retraining some of the existing migrant city dwellers to do more than pour concrete? Nothing really helps because the demographic die has already been cast.
This paper comes up short though as it leaves us hanging there. What investors are most concerned about is how China intends to deal with this?
Some of the response is already visible. The relentless jamming up of minimum wages is forcing employers to think smarter several years before this becomes a pressing necessity. The pivot in favor of domestic consumption began some time ago and will probably be a multi-decade campaign. SOE and financial sector reform today are lamely pursued but the necessity of progress in these areas is well understood.
How do I think this is going to play out? I have no idea; but I do know some of the smartest people on the planet are on the case and all involved are cognizant that a failure to face the problem, either due to policy inertia or vested-interest recalcitrance, will condemn China to a middle income trap and raise issues about Chinese Communist Party (CCP) legitimacy.
Addressing this problem is therefore the highest of high stake games but, given their track record over the last 30-years, I think the smart money goes on the CCP finding a way through. To fumble would be a terrible result for China and a not much better one for the rest of the world; but I’ve no doubt the planners are keenly aware of all this.
Besides and come on, the CCP hasn’t done such a bad job to date. Would it hurt any to assume they’ll carry on as before; resolute, pragmatic, flexible and ultimately get the job done? You know where my bet’s placed.
Happy Sunday
[This link will take you to the paper in full Has China Reached the Lewis Turning Point?]