China And The Lewis Turning Point: It Is Here

Business, China, Company Strategy, Economics, Europe

LewisCurve6May2015

By John Richardson

FOR the last four years, my fellow blogger Paul Hodges and I have been consistently arguing that China was about to hit the Lewis Turning Point.

This is the point at which any country runs out of surplus migrant labour, after enjoying a manufacturing-led boom resulting from the movement of lots of workers from the countryside to the cities. Crucially, these workers are prepared to toil for very low wages and so give developing countries a big competitive edge in low-value manufacturing for export markets.

The West Indian economist, Sir Arthur Lewis, who, gave his name to this turning point, described how after around 20 years (see the above chart), a developing country typically runs out of surplus migrant labour. It then has to try and escape the “middle income trap” – i.e. to start making higher-value goods to justify higher wages – otherwise it is unable to raise its average per capita income above around $10,000.

“What on earth are you worried about this for? Have you become an economist or something?” asked one of my contacts, who works for a European-headquartered polyolefins company in 2012. His view was that worrying about the Lewis Curve in China was pointless as it was too far away to be relevant to any corporate planner in any chemicals company anywhere.

Perhaps this is because far too many chemicals companies are only equipped to plan from one quarter to the next, due to how stock markets work.

Or maybe it’s more the fact that most people are so busy doing their “day jobs” of selling and producing chemicals that they do not have time to think about such “big picture” issues. Of course, though, seeing the big picture should be the job of your CEO, provided he or she is not too fixated on the next set of quarterly results.

But Chinese economist Huang Yiping said, in an important article in yesterday’s Financial Times, that it is now “obvious to everyone” that China has reached the Lewis Turning Point.

Huang, whose work I read as part of my research for chapter 6 of our book, Boom, Gloom & The New Normal, added: “When I wrote an op-ed in 2004 called ‘A labour shortage in China my friends laughed at me.”

This is no laughing matter for any chemicals company that failed to foresee where China is today. Here are just a few of the reasons why we should all be  worried about China reaching the Lewis Turning Point, from the same FT article:

  • China’s GDP growth is forecast to slow to 6.1% per year from 2016-2020, from 9.8% 1995-2009, according to estimates by Cai Fang, vice-president of the Chinese Academy of Social Sciences, which advises the government. A shrinking labour force is the main factor behind this decline. And these are just the official projections for growth. But real GDP growth, as opposed to the highly unreliable official numbers, could  end up being a lot lower.
  • 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.

The great news for China is that its leaders understand that you cannot defy demographics – hence, they have come up with  visionary new economic policies built around China’s demographic realities. If only this were also the case in the West.

PREVIOUS POST

How 3D Printing Means No Repeat Of China's Growth Story

05/05/2015

By John Richardson AS you can see from the above chart, China’s percentage sha...

Learn more
NEXT POST

Why The New Belief In Oil-Price Stability Is Wrong

07/05/2015

By John Richardson THE new consensus view on oil prices,  based on my discussio...

Learn more
More posts
The pandemic, climate change, plastic waste and the great divide: the world in 2025
13/06/2021

By John Richardson NOBODY SHOULD be surprised that the developing world has fallen behind in the bat...

Read
Developing world vaccine and financing crises threaten years of depressed growth
10/06/2021

By John Richardson MANY OF US are very familiar with the feeling of sitting at home, waiting to hear...

Read
Inflation pressures build on prolonged supply chain disruptions
08/06/2021

By John Richardson OK, I MAY have got this wrong. Inflation could be a bigger problem than I envisag...

Read
China polyolefins: key signals to monitor on whether 2021 slowdown is reversing
06/06/2021

  By John Richardson IT REALLY IS EXTRAORDINARY how commentators continue to use year-on-year c...

Read
Boom in petrochemicals demand guaranteed but we must grow sustainably
03/06/2021

  By John Richardson ONE OF THE GREATEST achievements of the last 30 years has been the fall in...

Read
Booming internet sales point towards strong 2021-2025 LLDPE demand growth
01/06/2021

    By John Richardson ONLINE SALES accounted for 19% of all retail sales in seven industr...

Read
We can solve the plastic waste crisis but we don’t have much time
27/05/2021

Here is another personal plea about the scale of the plastic waste challenge our industry confronts....

Read
Latest data indicate 37% fall in China’s 2021 HDPE imports with PP imports 49% lower
25/05/2021

By John Richardson DECLINES IN Chinese apparent demand for high-density polyethylene (HDPE) and poly...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more