Old Growth Model Needs To Be Challenged

By John Richardson

Calling all chemicals investors: If you hear any presentation from any company out there that talks about an uninterrupted boom in growth in China, please, please start asking some searching questions. Please…..

We have so far yet to come across any evidence of such questions after scouring the web. Instead, we have had the misfortune to listen to several rather dull “discussions”. The discussions have sounded more like self-congratulatory one-way traffic involving chemicals companies saying how wonderfully well they have done with investors in agreement.

But now, at last, we should begin to see a little more realism emerging.

As we have written about before, rising wage costs now represent a significant threat to the export-growth model that has been the main reason for China’s extraordinary growth in chemicals and polymers demand over the last decade.

Rising income levels (be careful what you wish for) are a factor – although in terms of relative wage costs, the China Economic Quarterly argues that China is still cheap when measured against other emerging economies.

But still, as the Wall Street Journal article we have linked to above indicates, purchasing managers at large Western retailers have reason to question the China out-sourcing model.

A recovery in manufacturing jobs-growth, even in the US, suggests fundamental changes are taking place. While wages costs are, of course, still much-higher in the States, strong productivity growth and a weaker dollar might have begun to reverse the drift in unemployment in some manufacturing sectors.  

Demographics, along with higher wage costs, represent a major long-term threat to the conventional China story.

The Economist magazine writes in its latest issue that the country’s latest census shows a sharp decline in population growth, below replacement level, as a result of the one-child policy.

“Slower growth is matched by a dramatic ageing of the population,” the article continues.

“People above the age of 60 now represent 13.3% of the total, up from 10.3% in 2000 (see chart). In the same period, those under the age of 14 declined from 23% to 17%.

“A continuation of these trends will place ever greater burdens on the working young who must support their elderly kin, as well as on government-run pension and health-care systems. China’s great ‘demographic dividend’ (a rising share of working-age adults) is almost over.”

Major demographic changes – both in the West and in Asia – will be some of the key themes we will explore in a new e-book to be launched on icis.com this month. This is in partnership with Paul Hodges, our fellow blogger.

The book also helps form the basis of our New Normal seminar, which takes place in Frankfurt next month.

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