China faces challenges in Asia

The rise of China to become a major world economy is one of the big changes in the world economic order over the last quarter century. That rise to economic superpower status today was not easily foreseen when China was emerging from the Cultural Revolution.

Forty years ago, China had a huge population of exceptionally poor and underemployed rural labourers. With the move toward a more market-based economy and the opening up to world trade, the Chinese economy has been transformed. A key part of that change was that many of these underemployed rural workers moved into manufacturing employment. The seemingly endless supply of unskilled labour was an essential ingredient in the exceptionally rapid growth of the Chinese economy.

Like the industrial revolution two centuries before in Britain, and the more recent industrialisation process in Ireland, Singapore and Malaysia, economic growth was fuelled by a move of unskilled rural workers to the industrial cities. The economies of Ireland and Singapore have long ago run out of the stock of underemployed rural labour.

While China still has a large poor rural population, its megacities have grown at such a rate that they are having difficulty creating the infrastructure to absorb the immigration from rural areas. While the Chinese authorities have undertaken a massive programme of infrastructural investment, there is a long way to go before the congested megacities can adequately accommodate their massive populations.

Precarious employment

To discourage further major inflows, the Chinese authorities make it difficult for rural immigrants to register as residents in the cities. Failure to get legal residency restricts access to public services, as well as leaving the individuals in a precarious employment situation.

The very difficult living and working conditions for these immigrants from rural areas have resulted in very high rates of labour turnover. Workers leave their employment either because of the living conditions or because they are not permitted to stay in the cities.

This rapid labour turnover causes substantial problems for employers. In addition, there has been some labour unrest affecting foreign multinationals operating in China. Significantly, the cost of labour to employers is rising, bringing better living standards for most working in the tradable sectors of the economy. However, the Chinese economy is losing competitiveness against some of its neighbours and some of the manufacturing employment involving less skilled labour is moving elsewhere. This process mirrors the migration of Europe’s unskilled jobs, which began decades ago.

The Economic and Social Research Institute has been working with colleagues in Vietnam on modelling the Vietnamese economy and this work provides an alternative window to examine developments in the Chinese economy. The joint research shows the Vietnamese economy is sensitive to its competitiveness relative to economies such as China. In recent years the strengthening of the Chinese currency and rising labour costs in China relative to Vietnam have seen relocation of some activity from China to Vietnam.

While Vietnam is also experiencing migration of poor rural workers into the major cities, compared with China there are few restrictions. Newly migrated workers are welcome to stay in the cities and this contributes to a lower level of labour turnover compared with China. In turn, this labour supply is one of the attractions of Vietnam for foreign investors.

However, as with China, the growth of large cities is putting pressure on Vietnam’s urban infrastructure. In Hanoi, a majority of workers commute on motorbikes. But, with rising incomes, car ownership is set to increase and the city will choke without investment. Already the richer Ho Chi Minh City (Saigon) has major traffic problems. This highlights the importance of maintaining a high level of infrastructural investment.

While China has been an economic marvel, and has often been portrayed as a threat to the dominance of developed economies, this is a false picture. Over the recent crisis, it has become clear that Chinese growth is complementary to that in Europe and the United States. We were grateful that the Chinese economy continued to grow and offer a ready market when Europe and the US were experiencing the Great Recession.

Over the next 20 years, China faces a huge challenge. The effect of the one-child policy means the number of young people entering the job market is going to fall rapidly. If Chinese workers continue to retire at 60, by 2030 the ratio of workers to retirees will drop precipitously from roughly 5:1 today to just 2:1.

The rise in old-age dependency will pose real challenges, and the burden of taxation will have to rise significantly. Without a western-style welfare system, individuals currently have to try and provide for their retirement through saving. Some form of welfare system will be required, but unfavourable population ratios mean it will not be cheap.

China has a short window of opportunity to build the infrastructure necessary for a modern developed country. There is a danger that it will grow old before its development is completed and before it joins the world’s wealthy nations.

Rival countries

What this means is that, in the growth “relay race”, China may soon begin to hand over the baton to other countries that are coming behind, such as Vietnam and

India

. In both these countries, while fertility is falling, the underlying demographics are more favourable.

Europe should see China not so much as a threat, more as a potential partner. China’s growth has already opened up significant new markets for European products and services. While much attention is focused today on selling to the Chinese market, over the coming decade more rapid growth is likely to be seen in countries such as India and Vietnam.