China’s “Migrant Miracle” Is Over——Demographic Ceiling Imperils Growth

by ZeroHedge

Exactly four years ago we began to discuss the idea that China is fast approaching its so-called “Lewis Turning Point,” which is defined simply as the moment in time when surplus rural labor is fully absorbed into the urbanizing economy leading to rising wages and falling productivity. At the time, SocGen suggested that “China [was] still some time away from reaching the type of urbanisation rates that characterised Lewis turning points in Japan and South Korea during their most rapid periods of industrialisation and wage growth.”

We revisited the issue in 2013, and began to discuss the idea that although urbanization had indeed contributed to productivity gains, the country faced offsetting demographic headwinds in the form of a shrinking working-age population. Additionally, we pointed to research from SocGen which suggested that from 2015 forward, the labor force in China is expected to contract.

Here we are in 2015 and sure enough, demographics in China are once again set to become a talking point, as the two trends mentioned above (urbanization and a decline in the working age population) play out against — and feed into — slumping economic growth. Here’s FT with more:

China’s labour force is shrinking and the “migrant miracle” that powered its industrial rise is mostly exhausted, removing the factors that propelled the country’s meteoric development, according to leading economists.


The transformation will lead to slower growth, reduced investment and a loss of export competitiveness, they warn, increasing the urgency of implementing ambitious economic reforms aimed at finding new sources of expansion.


“Now we are at the so-called Lewis inflection point. I made this forecast in 2006, and today there is no need to change it,” said Ha Jiming, chief investment strategist for private wealth management at Goldman Sachs in Hong Kong…


“The working-age share of China’s population peaks this year at 72 per cent, then it will start to fall rapidly, even more rapidly than what we saw in Japan in the 1990s,” he added.


Cai Fang, vice-president of the Chinese Academy of Social Sciences, a think-tank that advises the government, estimates that China’s potential gross domestic product growth decreased from 9.8 per cent in 1995-2009 to 7.2 per cent in 2011-15 and 6.1 per cent from 2016-20.


A shrinking labour force is one of the main drivers. Since Deng Xiaoping launched market reforms in 1978, 278m migrant workers from rural villages have moved to work in the cities.


But reallocating labour from farm to factory — resulting in higher overall growth as workers’ productivity soars — is now mostly complete.


“From 2005 to 2010, the growth rate of migrant workers was 4 per cent. Last year it was only 1.3 per cent. Maybe this year it will contract,” said Mr Cai.

For China’s economy — which, you’re reminded, may be growing far less rapidly than the official numbers suggest even as the official figures represent the slowest growth rate in six years — the above has serious ramifications. First it stands to reason that as the supply of new low wage workers shrinks, wages will rise, an eventuality which forces producers to pass higher costs on to customers thus undercutting export competitiveness at a time when exports are already under pressure from slumping global demand and the yuan’s link to the dollar.

This dynamic is exacerbated by a projected decline in the overall number of working-age citizens. Here’s FT again:

The dwindling flow of migrants is one aspect of China’s shrinking labour force. But the slowdown in urbanisation is coinciding with a rapid ageing of the population, another key shift underlying the Lewis Turning Point.


China’s one-child policy created a “demographic dividend” for the economy between roughly 1980 and 2014. Now that dividend is turning into a deficit. The population of Chinese aged between 15 and 64 peaked in 2013, Mr Cai notes. The ratio of children and elderly to working-age Chinese — the dependency ratio — began rising in 2011. 


The one-child policy was introduced in 1979, but the birth rate kept rising into the 1980s. Annual births in China hit 25m in 1987 and have steadily dropped ever since, hitting about 20m a year by 1997 and falling to 16m last year.


“Starting in two or three years, you’re going to see another substantial, precipitous drop in young labour entering the labour market,” says Wang Feng, an expert on Chinese demographics at the University of California Irvine and Fudan University in Shanghai.

Putting all of this together, China is faced with a new reality wherein the very conditions that have supported the country’s rapid economic growth may now be set for a wholesale reversal, as rising wages and a shrinking labor pool transform the industry-based economy (previously characterized by large trade surpluses and widespread inequality) into a service and consumption-based economy characterized by declining export competitiveness and falling rates of savings and investment. FT notes that the acceleration of economic reforms can help to ameliorate what is likely to be a painful transition and as you’ll see in the video below, the suggested solutions echo those we highlighted two years ago — namely, the creation of a sustainable social safety net, and the facilitation of labor mobility.