As the structure of China’s economy changes, moving toward Western trends that are indicative of a maturing market, the labor dynamics inevitably go through changes as well and as someone who is either holding Chinese assets or interested in gaining some exposure, it’s important to stay on top of these developments.
First and foremost, one must understand a few core quasi-axioms related to the changes China is going through as its economy matures, aspects those who have studied Western economies should be well aware of:
- Just like in the West, China’s population is aging and as a result, the working age population number stopped its upward trajectory as of 2012 and keeps gradually going down, with adults aged between 16 and 59 currently representing less than 900 million of China’s 1.4+ billion population. In today’s context which involves an inevitable slowdown of economic growth (typical for a maturing economy) and subsequently job creation (the supply of jobs), the fact that people are exiting the labor force and bringing the demand for jobs down while they’re at it can be considered a variable that balances the equation. However, in the long run, just like for most Western nations, the aging of a country’s population presents unique challenges… but more on that in future articles
- The unemployment rate is still quite low, despite the days of 10%+ yearly GDP growth being over since 2010. China ended 2018 with a registered urban unemployment rate of 3.8% and a surveyed urban unemployment rate of under 5%. However, as mentioned previously, the aging of China’s population plays a role in this equation. More specifically, the fact that the labor force participation rate goes down (as China’s population ages and exits the workforce) “helps” the unemployment rate, for lack of a better term
- Wages (unsurprisingly) keep going up, with an 8.3% YOY growth rate being experienced in 2018 compared to 2017. As this happens, globalization inevitably starts working against China for a change, with companies moving to other jurisdictions that put lower wage costs on the table, something that is especially visible when it comes to industries that involve the production of low value-added products. Just like in the West, China is gradually moving toward services. As a percentage of the labor market, China’s industrial sector experienced its peak in 2012 and has been going down since, as the service sector kept experiencing robust growth
- Other factors also contribute to the trend when it comes to production/industry-related jobs, for example the trade conflicts with the United States having caused a fair bit of damage, especially when it comes to sectors such as manufacturing
After drawing the line, an important question arises: are these changes positive or negative?
Unfortunately, there is no simple answer to this question. If we view the situation from the perspective of the industrial sector, these changes are anything but positive. However, any economist worth his salt could and should have stated that China can only keep growing based on its (in)famous mass production/export model for so long. As China’s GDP goes up and takes wages along for the ride, the production of low value-added goods inevitably becomes less feasible, with China ironically transitioning from the world’s #1 net beneficiary of globalization in that respect to a proverbial victim.
But is this truly a negative state of affairs?
No, not really, especially not if you embrace a long-term outlook. As China’s economy becomes more and more dominant, it is only natural that it moves toward more sophisticated business models, transitioning from being a globalization-facilitated destination for companies that are interested in lowering their labor costs to an economy capable of dominating industries through domestic companies. From Internet giants such as Baidu, Alibaba and Tencent (colloquially referred to as the BAT trio) to even dominating surprising sectors such as green energy (with China, for example, being the top producer of both solar and wind energy), China is simply embarking on a trajectory one can consider predictable for an economy that is maturing.
This process is likely to continue, with trends such as dramatic improvements when it comes to domestic consumption providing generation-defining opportunities for savvy investors. At the end of the day, this is what ChinaFund.com is here to help you do: avoid the pitfalls one falls victim to by being stuck in the past (business models that are no longer viable for a maturing economy) and keep your eyes open so as to spot mega-trends that revolve around domestic consumption, the service sector and many other dimensions of the Chinese economy.