Polypropylene (PP) is one of the world’s major plastics – used in areas as diverse as car bumpers and food packaging. And in recent years, consumption has soared due to China’s seemingly insatiable demand, as it became the manufacturing capital of the world.
But now, all that is changing. As we warned in chapter 2 of ‘Boom, Gloom and the New Normal’, China has hit the turning point of the Lewis Curve. Thus the front page headline of yesterday’s Financial Times warned:
“China’s migrant miracle grinds to halt as rural labour supply runs dry. 278m workers moved to cities since 1978. Ageing population to bring slower growth”
Nobel Prize winner Arthur Lewis’ key insight was that countries had a ‘free ride’ in the early years of industrialisation, as rural populations moved to the towns. Their contribution to economic growth had been limited in the countryside, focused on the planting and harvest seasons. But in the cities, they could work 12 hours a day, 7 days a week.
China followed this model from 1978, when Deng’s reforms began to open up the country to the outside world. Under World Bank guidance, China’s GDP maintained double-digit levels of economic growth as 278m peasants began the biggest urban migration in history.
Today, however, the ‘free ride’ has come to an end. And we can see the impact in the latest data for China’s PP market in Q1, based on data from Global Trade Information Services, as the chart above shows:
- China is the world’s largest market for PP, and used to be the largest importer
- Its market is still growing, up 13% versus last year, but the basis of its demand has changed
- Imports were down 8%, and instead exports were starting to grow – up 8%
- This pattern is set to accelerate as domestic production increases – it was up an astonishing 19%
The reason is simple. China’s new leadership fully understand the demographic challenge they face. They know they can no longer be the ‘manufacturing capital of the world’, as they no longer have constant supplies of cheap labour from the rural areas.
The chart above from KKR highlights the dramatic nature of the change now underway:
- In January 2002 (as China joined the World Trade Organisation), lower margin re-exports were 56% of its total exports (yellow line)
- They were still at 49% as recently as 2010 – but by January this year, re-exports had fallen to just 38%
- Over the same period, higher margin trade has risen from 44% to 51% of the total (blue0
- Both trends are also clearly accelerating
Thus the government is now happy to allow low-margin activities such as plastic film processing to move offshore to countries such as Bangladesh, Vietnam and Cambodia. Their aim is now to export higher-margin products, such as PP, that will instead enable China’s domestic incomes to grow.
Hopefully, more front page stories in the world’s financial media will help to get this message into the boardrooms of companies and investors around the world. Otherwise, they will continue to promote out-of-date strategies aimed at supplying China’s disappearing re-export trade.