China’s vast reserve of cheap workers in the hinterland is vanishing at a vertiginous pace.
We can now discern more or less when the catch-up growth miracle will sputter out. Another seven years or so - enough to bouy 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 that 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 fourteen years ago, but by then it was already rich, with $3 trillion of net savings overseas. China has hit the wall a quarter 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 that his country might have to resort to mass suicide in the end, shoving pensioners onto the ice.
Less known is the parallel - and linked - 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 at 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 140m workers, surely the greatest jobs crunch ever seen. “This will have far-reaching implications for both China and the rest of the world,” said the IMF.
These farm workers are the footloose migrants that 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 that such a process 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 16pc a year over the last decade in the East Coast hubs of Shenzhen, Beijing, Shanghai and Tianjin, though this slowed sharply in 2012.
Boston Consulting Group says that “productivity-adjusted wages” were just 22pc of US levels as recently as 2005. They will reach 43pc by 2015, or 61pc for the American South.
It is a key reason why General Electric (Other OTC: GEAPP - news) , Ford (NYSE: F - news) , Caterpillar (NYSE: CAT - news) 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 no bad thing. The world economy is rebalancing. China’s current account surplus has fallen from 10pc of GDP to just 2.5pc.
China’s corrosive gap between rich and poor should narrow. The GINI coefficient measuring inequality should come down from stratospheric levels, 0.61 according to researchers at Chengdu University.
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 (Other OTC: SHGR - news) 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 1950 -- failed. Most of the Mid-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 that 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 $2 trillion dollars 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 that China’s leaders are reverting to bad old ways: manic over-investment, more steel and concrete
George Magnus from UBS (Berlin: UBRA.BE - news) said investment made up 55pc of all growth in 2012, and will soon have to reach 60pc 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 700m 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 chutzpa by the world’s tallest tower in Changsha, to be erected in three months flat.
Standard Chartered (Other OTC: SCBFF - news) has just upgraded its China growth forecast to 8.3pc year and 8.2pc 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 over 30pc of GDP a year since the Lehman crisis and are still growing at a 20pc, wildly exceeding the safe speed limit.
Fitch Ratings said fresh credit added to the Chinese economy over the last four years has reached $14 trillion, if you include shadow banking, trusts, letters of credit and off-shore vehicles. This extra 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.
Mr Magnus said credit has reached 210pc 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 right word -- before the aging crunch and the credit hangover combine with toxic effect. One thing is for sure: a middle-income country with a shrinking work force is not about to displace the United States as global hegemon.