It always amazed me how cheap products are in the numerous ‘Bargain’ shops on our busy high street in the cosmopolitan Melbourne suburb I live in.
Just how can you sell pots and pans, knives, gardening utensils and art supplies for just a few dollars and still make a profit?
The answer of course is: Made in China.
The mass industrialisation of China over the last few decades fuelled by a massive inflow of cheap migrant labor from rural villages has created the huge factories (and sweat shops) that produce all these products so incredibly cheaply.
This urbanisation of China has created its 1.3 million Chinese millionaires (projected to reach 2.3 million by 2020) and millions more middle-class Chinese that have helped fuel Australia’s biggest ever housing construction boom as well as push up the prices of prestige real estate in best suburbs of Sydney and Melbourne.
As a property journalist I have reported first hand on this huge wave of Chinese money being spent on Australian real estate and there is of course the many tales of money being flown into the country on private jets to pay in hard cash for multi-million dollar luxury property.
But it’s these two extremes: mass production of cheap goods and aspirational wealthy and middle-classes that urbanisation has created that have combined, hand-in-glove, to bring about the end of the Chinese miracle and which rightly has Australian economists and global economists so jittery.
How has this happened: well the answer lies in a something called the ‘Lewis turning point’ (named after economist W. Arthur Lewis): a term used in economic development to describe a point at which surplus rural labor reaches a financial zero: in other words when productivity gains starts going backwards.
This is essentially what has happened in China: the wave of cheaper labour that propelled its extraordinary growth for decades is coming to an end.
China’s population is ageing so there are fewer young workers to carry out the unskilled work plus, with urbanisation many young Chinese people don’t want to work on a factory line for a tiny wage: they want the fruits of economic prosperity – easy, high paying jobs with benefits.
Also impacting on China has been a drop in global demand for its goods, over production and other countries like Vietnam, India and Bangladesh being able to produce them more cheaply.
The end result: factory wages have doubled in the past 7 years, company profits have tumbled and many manufacturers are now looking to shift their factories from China to places like Vietnam and India, which are much further down the economic development scale, and where they can employ people on much lower wages.
An excellent 15 minute video prepared by the Financial Times tells the story of how China is changing through the eyes of two people:
- Yang Zonghou, a migrant worker from Hunan province who lost his job in a Japanese toy factory when it closed down last year and is now considering returning to his local village and family.
- Ha Van Huy, a 28-year-old Vietnamese man who worked illegally for a while in a Chinese factory sewing the fabric layers for headphones and earning twice the salary he earned in Vietnam.
It seemed almost too incredible to fathom that Chinese factories are willing to employ illegal labour from Vietnam but this is indeed happening as “factories that powered the country’s growth for decades are being squeezed by a shortage of workers, rising wages and falling prices” the FT.com video shows.
As Yang Zhanghou explains, whereas in the past Chinese workers were happy to work hard and earn whatever they could, and send a bit back to their families, now everyone wants easy jobs with benefits.
The factories won’t employ him because he is too old while at the same time the he says the villages are filling up with young people who are “choosing to be at home”.
So where does this leave countries like Australia: staring down the proverbial barrel.
This has already unfolded in the resources slowdown, which was fuelled by China’s previously insatiable demand for raw materials like iron ore, copper and aluminium which drove up commodity prices and generated record profits for Australia mining companies.
With the slowing Chinese economy, demand for these commodities has fallen – and so to have commodity prices as oversupply has set in. In February, the world’s biggest mining company, Australia’s BHP Billiton posted a $7.84 billion loss in its interim results.
Luckily a big drop in the Australian dollar has resurrected sectors like tourism, property and education, though all of them have become increasingly reliant on China’s emerging middle class to fuel their growth.
The FT.com documentary ends by warning that if the slowdown continues, it could force the whole world into a fresh economic crisis.
“If that does not happen, rising labour costs mean consumers will have to pay more for everything…Made in China.”
That of course could spell the end of the Bargain stores on my local shopping strip with their cheap goods.
But it seems an infinitely better option than a world-wide financial crisis.
- For more on how the end of the migrant miracle is changing the Chinese economy and the world, the FT.com has some excellent articles.