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China Workforce Slide Robs Xi of Growth Engine

By Bloomberg News
January 21, 2014 2:41 AM EST 13 Comments
A worker assembles a Peugeot 3008 SUV on the production line at a plant operated by Dongfeng Peugeot-Citroen Automobile in Wuhan, China.
Photographer: Tomohiro Ohsumi/Bloomberg
A worker assembles a Peugeot 3008 SUV on the production line at a plant operated by Dongfeng Peugeot-Citroen Automobile in Wuhan, China.

China’s second straight annual drop in its working-age population is robbing President Xi Jinping of an engine of three decades of growth, underscoring the need to close the gap between his achievements and ambitions.

Xi and Premier Li Keqiang, who in November unveiled the broadest policy shifts since the 1990s, are facing a labor force decline that the United Nations estimates will total almost 30 million in the decade through 2025. China’s working-age population, or people age 16 to 59, fell by 2.44 million in 2013, the National Bureau of Statistics said yesterday.

The demographic bind adds pressure on Xi and Li to find sources of growth beyond plans that may have a limited impact, including an easing of the one-child policy, while they try to absorb about 7 million college graduates a year. Leaders also face headwinds from reining in a record credit boom, with the central bank pumping funds into the financial system after money-market rates yesterday rose by the most in seven months.

“The decline of the labor force just makes everything more difficult in terms of generating growth,” said Freya Beamish, a Hong Kong-based economist with Lombard Street Research. “You have less people to take part in production and that reinforces the need to be more productive. It makes more urgent the need for China to find ways to shift capital to areas of the economy that can boost productivity.”

While government data yesterday showed China’s $9.4 trillion economy expanded 7.7 percent in the fourth quarter from a year earlier, exceeding the median estimate of analysts in a Bloomberg News survey, gains in factory output and investment spending moderated last month. Growth was 7.8 percent in the third quarter.

Money Markets

China’s benchmark stock index yesterday fell to the lowest in almost six months on concern economic growth is slowing and share sales will divert funds from the market.

The Shanghai Composite Index rebounded 0.9 percent today as the People’s Bank of China added more than 255 billion yuan ($42 billion) to the financial system and expanded a lending facility to meet Lunar New Year demand for cash.

The nation’s money-market rates slid the most in four weeks today, following yesterday’s jump. The benchmark seven-day repurchase rate, a gauge of interbank funding availability, slumped 105 basis points to 5.54 percent as of 2:59 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center.

Market Confidence

Yesterday’s stock-market slide and the possibility of the nation’s first default on a high-yield trust investment product “suggest market confidence is weak,” which may have put pressure on the government to take action, Nomura Holdings Inc. said in a note last night.

Increases in industrial production and manufacturing investment eased from 2012 while the government’s measure of services in the economy surpassed that of manufacturing and construction for the first time since China opened its economy in 1978, data yesterday showed. At the same time, growth in household consumption probably trailed investment gains last year, according to Royal Bank of Scotland Group Plc.

Income gains are slowing. Urban per capita disposable income last year rose 7 percent in real terms to 26,955 yuan, the NBS said yesterday. That’s the slowest pace since 2000.

China’s working-age population fell 3.45 million in 2012, the agency said last year, a figure that covered people age 15 to 59. NBS head Ma Jiantang said yesterday the age range was changed to reflect China’s labor law.

More Important

“This will be a more and more important issue as the low-end labor market becomes tighter and tighter,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “That’s why manufacturing firms are bracing for higher costs and trying to improve efficiency by importing machine tools to have greater automation of production.”

Growth in the labor pool contributed about 10 percent of China’s economic expansion over the past 35 years, with the influence waning in recent years, according to HSBC Holdings Plc. The key to expansion now is boosting productivity through changes to the financial and fiscal systems and deregulation, said Sun Junwei, a Beijing-based economist for HSBC.

China’s potential growth rate may have slowed to a range of 7 percent to 8 percent this decade from an 8 percent to 9 percent range in the previous 10 years, Fan Gang, a Chinese government economist and former academic member of the central bank’s monetary policy committee, said today at a briefing in Beijing.

Human Capital

While labor growth may be slowing, China’s “human capital” may be increasing as education and productivity improve, supporting the nation’s competitiveness, Fan said.

The decline in China’s working-age may have a silver lining: helping the government restructure the economy away from investment and manufacturing-led growth as pressure on policy makers to create jobs eases, says Wang Tao, chief China economist at UBS AG in Hong Kong.

“The government has a little less pressure to push fast growth,” she said. “This will give them the incentive to reduce overcapacity in some sectors while the labor market is relatively tight because they have less worry over unemployment.”

Ten million new manufacturing jobs would correlate with an economic growth rate of roughly 8 percent, whereas 10 million services sector jobs would correspond to a pace of about 5 percent, according to estimates from The Conference Board, a New York-based research group.

Debt Buildup

Authorities are in the meantime trying to rein in credit and shadow banking amid rising concern that an unprecedented debt buildup will trigger a financial crisis.

Industrial & Commercial Bank of China Ltd., the nation’s largest bank by assets, last week rejected calls to bail out a troubled 3 billion-yuan trust product it distributed for China Credit Trust Co., a bank official with knowledge of the matter said. China Credit raised funds for a coal miner that subsequently collapsed.

Trusts and shadow banking will see defaults this year, which may be good for China because it prevent financial risks from worsening, Zhang Ming, a researcher and director of the international investment department at the government’s Chinese Academy of Social Sciences, said today at a conference in Beijing hosted by Bloomberg LP, parent of Bloomberg News.

Xi’s crackdown on extravagant spending by and for government officials has also hit part of the economy, hurting vendors like Tian Rong in Urumqi, Xinjiang province. Two weeks before the start of Chinese New Year, sales were down at her booth selling liquor and wine at a one of the country’s largest markets for New Year gifts.

“Ever since Xi Jinping came to power, no one is buying the expensive bottles,” Tian said Jan. 18. “Just look, every sale is only a few hundred yuan at most. Even the government officials are buying the same brands as everyone else.”

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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