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> My breakfast host yesterday suggested that there will be nuances
> along the way that will surprise and defeat expectations
> Rising wages will burst China’s bubble
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> By Peter Tasker
> Published: January 10 2011 20:29 | Last updated: January 10 2011 20:29
> Who has survived the global credit crisis in the best shape? As Zhou
> Enlai is reputed to have said about the impact of the French
> Revolution, it is still too early to judge. The snap verdict that
> China is the big winner and the US and rest of the old Group of
> Seven big losers is already looking questionable.
>
> True, China has continued to register turbo-charged growth while
> many of the debt-laden economies of the west have struggled. No
> surprise, then, that a tsunami of financial capital has surged
> eastwards, or that European politicians are scrabbling for trade
> deals, despite China’s extraordinarily aggressive posture over the
> Nobel peace prize and other diplomatic issues.
>
> EDITOR’S CHOICE
> Rising imports help cut China’s surplus - Jan-10
>
> Lex: China in Europe - Jan-10
>
> Opinion: The world should not fear a growing China - Jan-09
>
> Lex: China’s fiscal policy - Jan-06
>
> beyondbrics: Emerging markets blog - Dec-01
>
> Analysis: Innovation – replicators no more - Jan-05
>
> The financial markets, however, have taken a rather different view.
> The Shanghai market is at less than half its all-time high,
> significantly underperforming the other three members of the Bric
> group. More surprising, since the start of the US subprime crisis in
> August 2007, Shanghai’s total return in dollars has been beaten by
> the American S&P500, the UK’s FTSE 100, and even the Japanese Topix.
>
> The message is clear. The China story that has been sold so
> skilfully all over the world is simply another version of the “new
> era” thinking that has characterised every investment mania from the
> South Sea bubble to the dotcom frenzy.
>
> After the extended period of disappointing performance, Chinese
> shares no longer look so expensive in terms of the current price to
> earnings ratio. But this may be deceptive. On the cyclically
> adjusted “Shiller PE” – which uses a 10-year average of earnings –
> the China market is even now almost as expensive as the US stock
> market was in 1929. In other words, the current level of Chinese
> earnings is high and probably unsustainable.
>
> There are good grounds for concern about the future. A significant
> increase in the profit share of national income, as we have seen in
> China this century, implies a significant decrease in the labour
> share – meaning that wages fail to keep up with economic growth. The
> other side of this is apparent in the gross domestic product numbers
> – a decline in the contribution of consumption and a ballooning
> dependence on investment. The longer these trends continue, the
> greater the ultimate reversal.
>
> We’ve seen this movie before – 40 years ago, to be exact. In the
> 1960s Japan was achieving year upon year of double-digit GDP growth,
> fuelled by government-directed investment into infrastructure
> projects such as the bullet-train network and the build-up of heavy
> industry. Throughout this period, workers were flooding into the
> cities from the countryside, depressing wages and setting off a
> virtuous cycle of rising profitability and rising investment.
>
> In the mid-1950s, Japanese labour had taken 60 per cent of total
> value added. In the miracle years this ratio fell to 50 per cent,
> then started a V-shaped recovery in 1970 as the labour market
> tightened. Ten years later it had soared to a plateau of 68 per
> cent. These gains had to be fought for. In the 1970s, Japan’s now
> dormant union movement was in its heyday. Profit margins were
> squeezed, and in real terms the stock market went nowhere for a
> decade.
>
> Can workers grab a bigger share of the economic pie before the
> urbanisation process is complete? In Japan they did. In 1970 Japan’s
> urbanisation ratio (the proportion of urban population to total
> population) was still just 53 per cent. Currently the Chinese
> urbanisation ratio is 45 per cent, roughly where Japan was in 1964.
> However, Chinese statistics are notoriously unreliable. The floating
> population of unregistered urban migrants is estimated at between
> 50m and 140m people. So China’s true urbanisation ratio may already
> be close to Japan’s in 1970.
>
> If China were to follow Japan, the next stage would be labour strife
> and inflation. The best way to avoid that outcome would be a radical
> tightening of the current super-easy monetary policy. But that would
> risk a serious slowdown and probably necessitate a large revaluation
> of the renminbi – both anathema to Beijing. Meanwhile, China’s
> reliance on a cheap currency is helping to fuel a trade war, in the
> words of the Brazilian finance minister.
>
> There is no good way out of the corner into which China has painted
> itself. Rebalancing the economy is absolutely necessary. It is also
> a long-term project fraught with risks for China’s rulers – and for
> investors who have bought the story of inevitable western decline
> and unstoppable Chinese ascent.
>
> The writer is is a Tokyo-based analyst with Arcus Research
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