China Demographics a Boon for Asia?

11/08/2012 8:30 am EST

Focus: GLOBAL

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

It seems China may have to hand off its manufacturing mantle now that its one-child policy is coming to fruition, which is good news for its regional neighbors, writes Ben Shepherd of Investing Daily.

The conventional wisdom is if China sneezes, the rest of Asia comes down with a serious case of pneumonia, and the only prescription is a steady drip of fiscal stimulus.

That’s the wage of almost exclusively single-partner trade, which has largely been the case throughout much of Asia for the better part of two decades. As China’s economy has grown and its manufacturing business has taken off, the country has shown a voracious appetite for Asian resources.

This time around has been different, though. To be sure, China’s gross domestic product growth has slowed and most indicators are flashing warning signs for its manufacturing and export businesses. However, with the exception of a few countries such as Mongolia and Laos, the rest of Asia is growing apace.

So what has changed? For one thing, while demand for Chinese exports has slowed thanks to weak growth in the US and the festering European debt crisis, Chinese manufacturers aren’t simply folding up shop and going home.

Labor costs in China have on average surged by 20% a year for the past four years. Wages in China’s coastal provinces, the country’s manufacturing and export hubs, have been rising even faster, as factories have been struggling to attract cheaper labor from the country’s interior.

As the central government has stepped up its spending in the country’s previously neglected hinterland, rural Chinese have been able to make a better go of life at home, negating the draw of factory life. And since most families already have at least one relative working in a coastal factory and are sending money home, there just isn’t an urgent need for cash.

While that’s created a virtuous cycle as far as the average Chinese is concerned, it’s made life tough for manufacturers who moved their operations to China to take advantage of cheaper labor in the first place. So rather than simply going out of business, manufacturing is leaving China at a quickening pace, bound for countries like Sri Lanka, Vietnam, Bangladesh, the Philippines, and Thailand.

While securing financing has been a challenge for many companies making the move, due to an underdeveloped banking system, metal works have been moving to Sri Lanka given its proximity to supplies of tin, aluminum, and other key inputs. Labor costs also happen to be just a third of those in China.

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Manufacturers of assorted consumer goods that don’t need their workers to have much in the way of education have been moving to Vietnam, Bangladesh, and the Philippines, where labor costs are just half of those in China.

Manufacturers of semiconductors and consumer electronics are shifting into Thailand, where the government is investing heavily in creating its own Silicon Valley of sorts, and the work force is well educated and a third less expensive than the Chinese.

Demographics are also beginning to prove a challenge for the Chinese. In 1978, China implemented its infamous one-child policy, restricting primarily urban couples to having and rearing a single offspring. While that policy has loosened over the years, about a third of the population is still subject to its stricture.

As the first generation of one-child babies has come of age and entered the work force, it has caused a subtle shift in China’s demographics, causing a more rapid aging of the population and shrinking the available pool of labor. Since China still essentially lacks a social safety net despite its socialist government, a growing percentage of workers’ wages is being earmarked for caring for elderly parents rather than being spent on consumption and investment.

While the country’s one-child policy might have made sense in the 1970s as a means of alleviating social and economic pressures, its perpetuation will only cause a growing strain on the country’s economy and social fabric.

The rest of Asia doesn’t face that sort of pressure, though. In countries such as the Philippines and Malaysia, the bulk of the population is of working age, and unemployment is falling as new factories are opening. That’s creating a growing tide of prosperity and reducing their dependence on Chinese trade, as they work to satiate their own domestic sources of demand. They’re also growing forces in the global export market, thanks to their lower labor costs.

Because of shifting demographics and labor cost differentials, the linkage between China and most of the rest of Asia is beginning to degrade, creating a number of opportunities for global investors throughout the region as the wealth is finally beginning to spread.

And none of this has to spell an end for China. Assuming its new government sticks to the plan to support its export base in the short term while working to foster long-term domestic demand, the country’s current shifting economic base could actually work in its favor.

It’s much easier to implement a fairly drastic change in economic models in the midst of an already unfolding transition. All of this change will also likely act as a lever, pushing China into an increasingly greater reliance on a free-market model.

Read more from Investing Daily here...

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