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Chinese workers' share of GDP reaching US levels

Wages rising amid growing labor shortages in aging population

| China

Chinese and Western policymakers do not agree on many issues, but one point of consensus has been on the need for Beijing to rebalance its economy toward household consumption.

Slowly but surely, consumer spending is indeed becoming an engine of growth and will be a critical factor in achieving the 6.5% economic growth target set out by Premier Li Keqiang in his annual work report to the National People's Congress last week.

The rise in consumption has gotten a helping hand from an unlikely force: demographics. Although the premature aging of China's population has been a source of great anxiety, it also has turned out to be a short-term blessing in disguise, helping households claim a larger share of national income.

Most observers had expected that the shrinking of China's labor force as workers retire would dent potential economic growth. In practice, however, the demographic shift has helped alleviate one of the main structural imbalances in the economy: the shortfall in income flowing to households and the excess going to companies.

China's migrant labor force, dominated by those aged 16 to 35, has shrunk since 2010, according to analysis by Enodo Economics. The end of surplus migrant labor has led to a decisive increase in employee compensation as a share of gross domestic product, following a decade of steep declines.

China's ratio is now higher than that of Japan or South Korea, both of which suffer from the same imbalance between household and corporate income. More significantly, the latest available data show that China's ratio has come close to that of the U.S., the global consumer juggernaut.

China's graying population is often analyzed in terms of the rising ratio of elderly to working age citizens and the strain this implies for public finances. But it is worth pointing out that a higher proportion of retirees, who consume but do not produce, should lead to a structural increase in the share of consumer spending in GDP.

This would be good news for an economy which has seen consumer spending as a share of GDP sink to extraordinary lows. While wage-earners in China now take home more or less the same proportion of national income as their American counterparts, overall average income remains much smaller than that of Americans.

While it is rarely noted, a key difference lies in the income households earn on their assets. President Xi Jinping's new housing strategy however could boost the incomes of Chinese households.

Xi has discarded former leader Deng Xiaoping's mantra that "to get rich is glorious" and with it, the idea that homes are assets. In Xi's new era -- which now looks set to last indefinitely -- people should regard homes as places to live, not as a commodity to be speculated on.

The strategy can be summarized as "to rent is good, to hoard is bad." Xi wants to develop China's nascent property rental market to facilitate continued urbanization as well as to provide affordable housing. He wants to make productive use of investment properties that now sit unoccupied because owners have looked solely to capital gains, not rental income, for their investment returns.

Reliable data on such vacant investment properties is hard to come by. However, one can get a sense of the magnitude by comparing property sales with sales of home appliances such as washing machines and refrigerators.

Unlike most other countries, properties in China tend not to be sold with fitted-out kitchens. So if housing sales had been booming because of investment demand, sales of household appliances should have lagged. Sure enough, while home sales jumped between 2015 and 2017, sales of washing machines and refrigerators show a very muted increase.

Last July, the central government selected 12 cities to take part in a pilot program to test rental housing strategies. Time will tell whether such experiments succeed in fostering the rental market and are rolled out nationwide.

If they are, the most popular investment asset of Chinese households would finally start generating regular income. This could well turn out to be another structural tailwind to sustain China's nascent rebalancing.

In the next couple of years, the benign impact of China's demographic changes should continue to outweigh the drawbacks. It is not until 2025 that the rate of decline in the labor force is expected to quicken dramatically and the upward trend in China's old age dependency ratio will worsen sharply.

By that time, the diminished productive potential of the economy is still likely to become an issue. A shrinking labor force by itself would lower the economy's potential growth rate, which is determined by the rate of increase in the factors of production -- labor and capital -- and the growth of their combined productivity. But it should be kept in mind that empirical evidence around the world suggests that over the long run, productivity growth is by far the dominant determinant of economic expansion.

China's communist system, based on top-down diktat, could make the distribution of income among age groups less of an intractable problem than elsewhere. It is fair to say that under Xi's leadership, the owners of capital are unlikely to come out on top. But even a communist regime will eventually find it harder to redistribute income between the economically active and the economically inactive.

Diana Choyleva is chief economist of Enodo Economics, a macroeconomic forecasting company in London.



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