The Future of China’s Economic Growth
by Ryan Fitzwater, Investment U Research
Wednesday, November 16, 2011
In 2010, China surpassed Japan to become the world’s second-largest economy and is now in the rear view mirror of the United States – currently at number one.
Over the past 30 years, China has amazed the world as its fastest-growing large economy, with an average growth rate over nine percent.
But this amazing story of growth faces an extreme obstacle… China’s aging workforce.
China’s interior is mostly made up of less-developed rural regions, while the coastal area is much more industrialized.
The country depends on young workers, who generally move from interior rural areas to urban centers, to work in the low-wage factory sector.
And because China is the largest exporter of goods in the world, it relies on young inexpensive labor to feed its monstrous exporting economy.
The only problem: The number of young workers is dwindling rapidly…
Why China’s Labor Pool is Shrinking
China’s steep drop-off is the result of three decades of a one-child population control policy.
The United Nations estimates that by 2025, the number of 15 to 24 year old people will fall by almost 62 million – a 35-percent dip. And the tightening of the labor market is already affecting factory owners in China.
This caused companies like Wenzhou Dazhan Photoelectricity, which used to manufacture cheap products like $2 sunglasses in the 1990s, to shift to higher-end products like LEDs and solar energy components. According to the company’s owner Xu Hui, you either make the switch to high-end, high-tech manufacturing or you’ll be left out in the rain.
There are two prevailing factors causing this shift:
- A shrinking labor force lowering the supply of workers and is pushing up labor costs.
- The rapidly rising land costs that China is currently facing raises overhead.
With investors expecting China to continue to hold up the global economy with crutches, manufacturers will have to begin to adjust to these demographic changes. If not, investors will look elsewhere.
Look No Further Than Japan
Look at what Japan did in the late 1960s as an example. Japan managed to make the shift to manufacturing high-end goods. Once they did so, they went from being a net importer of manufacturing equipment to a net exporter of those goods. This pushed Japan into the huge economic boom it saw in the 1970s and 1980s.
South Korea saw a parallel experience when it made the same switch in the late 1980s, and today sits as the thirteenth-largest economy in the world.
The answer is simple: China will need to prepare itself for a shift in the goods it produces to higher-end products or prepare for a slowdown in economic growth.
Keep an eye on high-end Chinese manufacturers such as Hon Hai Precision Industries Co., Ltd. (OTC: HNHAF.PK), which manufactures Apple (Nasdaq: AAPL) products through its subsidiary Foxconn.
Look for high-end manufacturers to lead the future of China’s economic growth.
Good investing,
Ryan Fitzwater
Any investment contains risk. Please see our disclaimer.
One Response to “The Future of China’s Economic Growth”
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I concur with your sentiments re China but I am puzzled as to why you, and almost all American commentators never mention the role of the Overseas Chinese in the China miracle. These entrepreneurs are the viable business community not only in Asia but in most countries in the world. They produce enormous wealth and they know how to use it. They also educate their children in every aspect of western thought and business applications, from MBAs , engineering, science and finance. These are the people called home by Peking when it made its decision to get rid of Maoist nonsense and join the new world.
The Overseas Chinese responded to China but exacted a price. All business was to be done in cash on the barrelhead, paid first, the services and work to follow. This is why Peking had to have dollars in such large amounts. China’s leap forward was an OC effort.
That fact is why China is sputtering now. The OCs do not like certain developments in China, saw an effort to jettison them and so just left, taking a large portion of the gold and silver with them occasioning the necessity for China to buy both. They also take with them the control of commodities outside of China which China needs.
Why don’t you refer to these facts. Please don’t reply that this is not the case. Singapore is the example of what and how the OCs work, so is Hong Kong, Bangkok, Macau and so many other places, there is no room to list them.
When you purport to be an “old China hand”, you had better know the OCs!
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