Is China's Growth Rate Destined To Be Cut In Half?
A new report by MainFirst Bank provides more ammo to the China bears. In "Why China's Growth Rate May Halve" author Bijal Singh has a very gloomy forecast on the country's growth rate, concluding it may "struggle to grow faster than 6%, given that China is now fully employing the vast bulk of its available urban labour force, and given that the Chinese working age population has stopped growing and is on a declining path." Singh takes Rosenberg's earlier rhetorical question about why collapsing profit margins have not yet impacted prices and believes that increasingly more companies will be forced to rationalize their operations, driving a stake straight through the heart of all those pushing for the tech bubble part 2: "Demand growth of 4%-6% may cause Chinese firms to shift focus from growing capacity to better management of existing capacity. Rather than capex equipment providers, computer service firms may be the winners in China over the next five years." The main driver for the GDP growth is that, due to the GDP being a function of job growth and productivity growth, it is the latter of the two which casts the assumption of GDP growth of 8% in perpetuity in doubt. "Over the last decade, productivity growth in China may have been no different to that experienced in the developed world. But China has been able to throw capital at the economy to grow its workforce at a rapid rate without incurring inflationary pressures." Said inflationary pressures are precisely the reason why the country is so cautious to do anything material about either its exchange rate (and today we yet again got confirmation of just who wears the pants in the Sino-US relationship), as well as its interest rate. All in all, changing demographics and economic conditions will make it increasingly difficult for China to manipulate its way into the required growth curve, which may well be the biggest risk to not only the BRIC growth story, but to that of the developed world as well (because now, unlike before somehow, decoupling is expected to work).
More from the report:
Three separate factors were at work: the release of 50 million workers between 1998 and 2005 from the State owned enterprises (SoEs); the estimated 20 to 30 million per annum migration into the urban areas; and the rapid growth in the working age population. In addition, in the late 1990s, urban unemployment was high due to the collapse in Asian demand following the tiger crisis. But all of these factors that allowed the workforce to expand are either no longer positive or indeed are reversing.
Unemployment rates in urban areas are low as evidenced by sharply rising wages, and the fact that net exports are no longer in a secular uptrend. Indeed the current account surplus with the US has been going sideways since 2006. Chinese labour is no longer compellingly competitive. Can the labour pool increase?
The number employed in SoEs has stabilised, and the working age population that was growing at 1.5% pa has peaked and stopped growing. And migration to cities may now turn sluggish. Migrants tend to be young. According to the Ji’nan survey, 58% of migrants are under the age of 25 and 74% are under the age of 30. Not only is the 15-24 age group declining in size by 20% over the next 5 years to 180 million from the current 230 million, but given the number of migrants that have already moved to the cities, the stock of potential young migrants in rural areas has also dwindled. Overall, the urban labour pool may struggle to grow faster than by 2% to 4% (and all due to migration) - the range dependent upon the ability to coax older workers off the land.
So, China’s GDP growth is likely to range between 4% and 6%. It is of course possible for China to grow faster, but that would trigger inflation, and possibly political unrest. The Authorities mantra for the future may be “moderate, non-inflationary growth”.
For much more, read the full report below (pdf)