4 Charts That Show Why Krugman Thinks Chinese Growth Has Hit The Wall

One of China’s biggest impediments is that it appears to have hit the Lewis Turning Point.

This is the point at which declining rural labour supply raises bargaining power for higher wages. This also marks the point at which the shift of people from agriculture to manufacturing does not lead to productivity gains for an emerging nation.

In a new piece, Paul Krugman argues that this is why China has hit a wall.

“Now, however, China has hit the “Lewis point” — to put it crudely, it’s running out of surplus peasants. …That should be a good thing. Wages are rising; finally, ordinary Chinese are starting to share in the fruits of growth. But it also means that the Chinese economy is suddenly faced with the need for drastic “rebalancing” — the jargon phrase of the moment.”

This argument has previously been made by Peter Orszag and other economists.

This chart shows the decline in agricultural employment:

china lewis turning point

This chart shows that even in poorer regions and during times of slack, wages have been rising. This is considered to be a sign that the rural surplus labour is running out.

coefficient for year dummies

Here’s a stylised chart of the Lewis turning point from Nomura:

lewis turning point

And we’ve seen that it’s taking more and more credit growth to deliver less GDP growth:

china credit gdp growth chart

 

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