The Future of China's Economic Growth

by Ryan Fitzwater, Director of Research, The Oxford Club

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

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