Comment: Concerns over Chinese labour shortage

Martin Flanagan

Martin Flanagan

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IT USED to be economic folklore that if America sneezed, the UK and Europe caught a cold. But, given China’s voracious growth in the past three decades that country has become as important to western economic optimism as factors such as US strength and the global oil price.

Clouds have already gathered as China has indicated that those high growth rates may be slowing. The worry periodically bashes shares in the major mining companies that are a big swing sector in Britain’s FTSE 100 index, such as Rio Tinto, Anglo American, BHP Billiton, Lonmin and the rest.

But western concerns about China stepped up a gear last week when senior economists in that country suggested the labour force is shrinking as the “migrant miracle” of hundreds of millions moving from poor Chinese rural areas to work in the urban factories is running out of steam.

That mass migration began in the late 1970s and has been a key factor in China’s industrial explosion. But it could not go on forever as rural populations declined.

The contrast is stark. Between 2005 and 2010 the growth rate of migrant workers was 4 per cent, says the China Academy of Social Sciences, which advises the Chinese government. Last year it was 1.3 per cent.

Economists say this is almost bound to trigger slower economic growth as the diminishing availability of new rural labour leads to higher wages, higher interest rates and reduced business investment. There is also the problem of China’s one-child policy, leading to an ageing Chinese population.

It is no coincidence that last week Australia cut its interest rates to a record 2 per cent low, partly due to the chill coming from China, a vital market for its iron ore and coal.

From 1979 to 2010 China’s average yearly annual growth was a whisker under 10 per cent. GDP grew at 7 per cent in the first quarter of 2015, down from 7.3 per cent in the fourth quarter of 2014. That was the slowest in six years.

Chinese businesses have got used to an endless supply of such labour to help boost productivity. It is the macro productivity equivalent of an individual business being able to boost the bottom line by taking out costs. It helps initially.

But the real trick for management is to be able to expand a business and boost the top line at decent profit margins through vision and efficiency. In the same way, Chinese businesses cannot now just flatter productivity with imported rural workers in factories and on construction sites. They have to become better at the use of technology, and management of their capital reserves and investment, as well as sharpening up their acquisitive skills.

Meanwhile, the Chinese authorities – with the West looking on with some anxiety – have a dilemma. They might want to cut interest rates to decelerate the slowdown, but the looming upwards pressure on wages will restrict their room for movement. It’s a Chinese puzzle. «

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