China Update

A few weeks ago, I laid out my thesis on how rising costs are going to create structural headwinds for corporate profitability going forward.  Jeff Matthews reinforces this argument by noting that China's one-child policy is fast creating a shortage of labour.

What is going on is this: costs in China are rising, and they will continue to rise for years to come. In fact, he said, costs will rise the rest of the decade at a rate that places China among the higher-cost manufacturing areas of the world.

And it has nothing to do with the Yuan.

What it has to do with is China’s “One-Child Policy.” ...

the demographics in China are shifting rapidly from a surplus of labor to a shortage. And by “rapidly” he means “the next three years,” when the 18-25 year old population drops by something close to one-third.

Now, the effect of this mind-boggling demographic shift was already felt, early this year.

After the Chinese New Year, a number of U.S. companies reported that an unusual number of factory workers failed to return from their inland homes, reducing their manufacturing efficiency, increasing costs-per-item, and forcing a shift to airfreight in order to get product to markets on time.

What is happening is this: as China promotes economic expansion away from the crowded south, jobs are opening up where none had been before.

To put numbers on it, according to our acquaintance, some factories were 25% short of labor after the Chinese New Year, and thus operated at as little as 75% of capacity.

And this problem for the manufacturing base in China is not going away: in fact, it will get worse as the labor surplus dries up.

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