China Deals With Demographics In The Right Way

Business, China, Company Strategy, Economics, Europe, Polyolefins

Poorandageing

CHINA’S approach to its challenging demographics are in complete contrast to the Russian approach, which we outlined yesterday.

In the case of China, its strategy involves:

  • Providing manufacturers with strong incentives to relocate from high labour cost coastal provinces to low labour cost inland provinces. These incentives include discounted land and paying all of a company’s relocation expenses, writes the New York Times. Whilst average blue collar wage costs are going up because of the  legacy of the one child policy, there is still a significant gap between wage rates  on the coast and inland due to different rates of economic development. And so relocation inland is a way of preventing factories from shifting overseas.
  • This has been supported by huge investment in roads, rail  and other infrastructure in the inland provinces. This  investment makes sense, unlike all the empty condos in China’s smaller towns and cities. Manufacturers can thus move inland in the knowledge that the logistics of longer routes to major markets will work.
  • This infrastructure investment involves quicker and lower cost transportation links overseas, as well as within China. “New railroad routes from western China to Europe, as well as sprawling new airports with freight terminals built deep in China’s interior, are making it possible to ship goods directly from inland factories to foreign markets without relying on the giant ports of Guangdong, Shanghai or other coastal areas,”  adds the New York Times in the same article.
  • And, of course, as income levels rise in western provinces as job prospects improve, this boosts consumption. This will help China replace the demand that will be lost as a result of the overall ageing of its society.
  • In parallel, a way needs to be found to justify manufacturing in the higher cost coastal provinces. The answer here is to move up the manufacturing value chain through, again, provision of generous government  incentives supporting innovation. But the “China price” for very good smart phones etc., and even one day  perhaps for metallocene polyethylene, will never be as high as some Western companies might think.
  • There are many other ways in which China is seeking to compensate for the legacy of is One-Child Policy, which we will think through and discuss in later posts.

China’s demographic challenge is enormous and so success is far from guaranteed. As a reminder, for instance:

  • Over the next 20 years, the ratio of workers to retirees will fall from around 5:1 to 2:1, according to the Brookings-Tsinghua Centre.
  • Between 15-25% of 1980-2010 GDP growth was due to favourable age structure, adds the centre.

And the only way that China can be successful is if it dumps its unsustainable current growth model. This includes too much spending on high-end real estate, and on heavy industries in the wrong geographies in already oversupplied industries.

The great news is that this growth model has been dumped. There will be no turning back.

But the transition process will be very difficult for China and for the global economy. We are with fellow blogger Paul Hodges, who yesterday repeated his warning that China’s real GDP growth could fall into negative territory during the transition.

Still, though, China has adopted the right approach as it tries to tackle its demographic crisis – and so it has every chance of being successful.

In the case of Russia, its attempt to compensate for  a weak domestic economy carries huge geopolitical risks. A new Cold War is the last thing that Europe needs.

As for many Western politicians, they don’t even recognise that demographics are behind Europe’s drift into deflation.

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