Nomura economist Richard Koo is famous for diagnosing Japan’s balance sheet recession — and saying America faces the same.
But on China Koo sounds very bullish recently (via FT Alphaville).
Koo says China’s excessively high savings rate is due to sweatshop labour policies. And now the labour shortage will cause wages to rise. So too will the value of the yuan:
If China’s surplus of rural labour has in fact been exhausted, the authorities are more likely to tolerate additional appreciation of the currency. The rising price of wheat and other foodstuffs also makes it easier to support a stronger RMB, as higher overseas wheat prices limit the negative impact of RMB appreciation on Chinese wheat farmers. In summary, I think the Chinese authorities are likely to allow a gradual appreciation of the RMB as wage inflation becomes more evident.
Factory owners that don’t hike wages will be forced out of China:
That golden era for owners of capital has now passed. As China’s economy reaches full employment and wages normalize, labour-intensive industries whose business model is based solely on low wages will either have to raise employee productivity or leave China. Nearly all of these changes are occurring as part of an inevitable shift in Chinese demographics. I expect the balance between investment, consumption, and wages will gradually normalize as the remaining surfeit of rural labour dries up.
BONUS: Here’s a chart of surplus labour from a recent Nomura report. The surplus peaked at the beginning of 2010 and has been dropping since.
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