Friday, July 16, 2010
CHINA is entering a future where it will run out of workers. Its workforce will peak within five years, says eminent economist and China-watcher Ross Garnaut and the consequences for Australia and the world could be profound.
In a forward look to China in 2030, Professor Garnaut told a Melbourne Institute/Australia-China Business Council forum the next 20 years would be dominated by China's transition from population growth to population decline with its labour force declining first.
The consequences would include a fall in China's savings, a decline in its lending to the world, and hence rising interest rates impinging most on heavy borrowers such as the US and Australia.
Professor Garnaut, a former ambassador to China and now at the Melbourne Institute, said China's population would peak in about 2030 with 1.45 billion people, of whom 400 million would be over 60. But the labour force would turn around first. After growing by 7 million a year over the past five years, it would shrink by 1 million a year from 2016, and by 5 million a year from 2021.
Professor Garnaut said worker shortages had already emerged, pushing up real wages. "Real hourly wages rose 90 per cent between 2001 and 2009, and non-wage benefits rose even faster. That crunch is going to increase."
While savings rates of more than 50 per cent of gross domestic product had driven China's extraordinary growth which the late economics historian Angus Maddison predicted would see it overtake the US in real GDP by 2015 savings would decline as wage share of income rose and that of profits fell.
"Household savings rates in China are 35 per cent, very impressive compared to others," Professor Garnaut said.
"But corporations save almost 100 per cent of their profits and reinvest them. In future, savings and investment rates will be closer, and the current account surplus will decline.
"That will make it more difficult to fund the savings deficits in the world including Australia's large deficit in private-sector savings.
"As China's savings fall, global interest rates will rise and debt will become more expensive to finance.
"The rest of the world will be sorry if it gets what it asked for."
But Professor Garnaut said a shrinking workforce would not necessarily shrink China's growth.
Productivity growth could accelerate as its skilled workforce moved into "more technologically sophisticated and capital-intensive" sectors spreading its competitive pressures to a wider range of industries in the West.