Dec 07, 2022

China's Population Collapse

Where will cheap labor come from?

In China, between 1958 and 1978, where you were born is where you lived.

You were born, the Chinese government gave you a permanent registration in your hometown. And with very few exceptions, you were not free to move about the country.

This all started to change in 1978, when the Chinese government moved from a centrally planned economy where the government dictates everything that's going to be made within the country, and instead allowed people to start businesses and allowed foreign money into the country.

This allowed people and organizations to make anything they wanted. So all sorts of factories and industries started to pop up along the coast of China.

They needed labor, preferably cheap labor, and the dirt poor subsistence, rural population needed money. They wanted money. So when the government started to lift this ban on moving about within the country, however so slightly, both parties got something they needed.

This rural population became China's migrant workforce, providing the fuel for China's development, migrating from rural areas into major cities and manufacturing centers for large portions of the year.

In 1978, there were virtually zero of them. But by 2009, there were over 225 million. And by 2018, that number ballooned once again, by almost 30% to 288 million.

But it appears that this nearly continuous 40 years of cheap labor growth in China is coming to an end or has come to an end already. Between 2018 and 2021 only 4.2 million migrant workers were added to the workforce.

That's growth of less than 1.5% over the course of four years. In addition, migrant workers have become a more expensive source of labor, wages have gone up by over 240% since 2009.

But most importantly is the fact that China's population overall in size, has likely peaked. In 2021, population growth in China was just 0.03%. And yes, China did remove its one child policy, but it's going to take years to go from baby to working adult.

This means that there aren't young people coming up into the workforce to replace all the migrant workers inching closer and closer to retirement.

Herein lies the problem. Because of all the goods produced in China, only 54% of them are consumed by the Chinese population, which leaves the economy vulnerable to companies and countries saying, "We're going to manufacture somewhere else where it's cheaper."

And at nearly 19% of global GDP, if China's economy sneezes, the rest of the world's economy is going to catch a cold. They still import $2 trillion worth of goods from other countries.

Ideally, China is able to smoothly pivot into a more balanced economy while India takes over as the main driver of global economic growth. With a population of 1.4 billion people, equal to that of China's but an economy that's less than 20% its size, there's a lot of opportunity for growth on the Indian subcontinent.

The world is even expecting 44% growth from the Indian economy over the next five years. But to grow beyond expectations and have a boom similar to the one China experienced in the 2000’s something would need to incentivize companies to choose India instead of China.

Assuming this is what India wants, the catalyst it needs may very well have been the continuous Chinese lockdowns and now mass protests in places like iPhone City.

Both of these have accelerated Apple’s plans to diversify their manufacturing operations out of the country, stating this week that suppliers should plan more actively for assembling products elsewhere in Asia.

Citing India specifically as a preferred destination along with Vietnam.

But for a long time, people have been saying, "India is the next China." And it hasn't materialized. We'll see if this time is different.

Don't let the economy surprise you.

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