China's future is hitting a new Great Wall

The decades-long flood of peasants into cities in search of work is altering the nation's economic landscape.

By Bruce Kennedy Jul 22, 2013 10:02AM

Great Wall of China (© Photodisc/SuperStock)In spring 1979, I was an exchange student in Hong Kong. The U.S. had just normalized relations with China, and I was able to get a place on a short tour into Guangzhou, the city most Westerners knew then as Canton.


Rather than travel by train across the border like most people, our tour had to fly the 80 or so miles from Hong Kong (then a British Crown Colony) into Guangzhou. As we gathered on the tarmac, waiting for buses into the city, we could see a construction crew on the other side of the airport. We passed that group of workers as we drove out. Dozens of people, men and women, were carrying on their collective shoulders a long section of concrete drainage pipe maybe 10 or 12 feet in diameter.


And I remember thinking at the time: That's the personification of the word Americans know as coolie -- the bitter strength (ku li) of the Chinese peasant.


Those peasants have a long history of traveling to find better opportunities. They helped build America's railroads 150 years ago. And people closely watching China's growth say the hundreds of millions of peasants moving to China's cities today are propelling its economy into a new crisis.


This year marked the first time in history that more than half of China's 1.3 billion people officially live in cities. Compare that with 1982, when according to data quoted by Britain's Telegraph newspaper only 20% of Chinese lived in cities, or even from 2000, when that figure was 36%.


Paul Krugman, the Nobel Prize-winning economist and columnist for The New York Times, dealt with that issue last week in a column that's been getting a lot of attention. He says the engine powering China's decades of dramatic economic growth has reached its limits and is in trouble.


That engine, he says, has been China's "surplus labor" -- those ambitious, newly arrived peasants in China's cities, making a pittance in urban factories.


Countries in the early stages of economic development, such as China was in the 1980s, can invest in factories, construction and infrastructure without running into the issue of diminishing returns because, according to Krugman, "they can keep drawing in new labor from the countryside." At the same time, he notes, "competition from this reserve army of labor keeps wages low even as the economy grows richer."


But the dramatic exodus of China's rural population to its cities is changing that formula. As Krugman bluntly puts it, China is running out of surplus peasants, and those peasants-turned-city-workers are also demanding a bigger piece of the economic pie.


Wages are rising, he writes. "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. Investment is now running into sharply diminishing returns and is going to drop drastically no matter what the government does; consumer spending must rise dramatically to take its place."


Krugman later described the Chinese economy as a runaway bicycle -- incapable of slowing down but in danger of falling over if it stops moving forward. And "running out of peasants creates a wall" that's looming in front of that runaway bicycle, he says.


More on moneyNOW

42Comments
Jul 22, 2013 12:27PM
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China will experience all of America's economic history since the start of America's *industrial revolution* to it's current condition of collapse......but China will experience it all in one generation's lifespan.
Jul 22, 2013 1:10PM
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The Chinese have always being will to go anywhere in search of work and profits.  Their history shows they are undeterred by foreign lands and discrimination.  They believe as many here used to do, that hard work, saving, and trying to make it better for the next generation are the only things that are important.  Sacrificing the current generation for the next, like that of the Greatest Generation facing the Great Depression and  WW2, creating the worlds's greatest country and making a large middle class the envy of the world.

 

Now it's about the destruction of that same middle class and the greed and selfishness of it's businesses and leaders than can't see beyond their own personal gains at the expense of everyone else.  And as we fall into second or third tier world status, we can only wonder what went wrong.

Jul 22, 2013 3:09PM
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We could fix China by simply exporting our politicians, bureaucrats, lobbyists, and lawyers. They would sink like a rock.
Jul 22, 2013 3:27PM
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The good thing about this is jobs are actually returning to the US. Sure, the labor costs are lower but they are rising and so is the costs of shipping things to the US. There are new assembly plants opening here often and the trend will continue as long as the Chinese worker continue to demand higher wages.
Jul 22, 2013 2:37PM
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Isn't this the way of all emerging market based economies?  China is going to hit a wall just as the USA did back in the 1800s and will go through all the growing pains that come along with the maturation of their economy.

This isn't news.  Most economists foresaw this.  Growth cannot continue unabated in perpetuity.

Jul 22, 2013 1:38PM
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GIVE IT ANOTHER 25 YEARS .. IT WILL STALLS AND GO NOWHERE  !
Jul 22, 2013 11:04AM
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China's biggest problem isn't a supply of workers, it's biggest problem are resources to keep the economy afloat. As long as China has plenty of Food, Clean Drinking Water, Shelter, and commodities such as Gold, Precious Metals, and Crude, they will never have to worry about any supply of workers. This China we see today is far different than any economy type we have seen in the past. Therefore the economist can throw out, all their bogus models.
Jul 22, 2013 12:43PM
Jul 22, 2013 3:25PM
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China's economy is borrowed from the want and need of other countries, produced at slave wages. Never can be a sustainable model. Same problem with most of South America. Don't think their domestic GDP consumption has ever gotten to 30% yet, and they are beginning to feel the sting. They aren't saving the money from wages, they just don't earn enough to participate.
Jul 22, 2013 4:55PM
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Don't worry all...They'll be calling in their "loans" to us very soon if funds are this short...

 

Just saying..

 

Sincerely,

 

A dis-satisfied customer and voter...

 

Jul 22, 2013 1:31PM
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What writer Bruce Kennedy and economists like the grossly overrated Paul Krugman fail to understand is that VALUE OF MONEY is what is lacking in China. 

 

The whole world is following the BAD EXAMPLE of the U.S. Federal Reserve Bank.  Nation after nation devalues its currency in the name of increasing exports.  To do so is to put exporting ahead of one's own people!  Why do people work hard for a living?  1) To survive.  2) To have a better life.  If the FRUITS of one's LABOR are EXPORTED to the United States, then one has NOTHING to show for working hard.  This is the problem of the poor Chinese worker.

 

China needs for Premier Li, who is a free marketeer, to let the yuan rise so that the workers gain purchasing power.  Unfortunately, the Politburo, including the Premier Li's senior partner, President Xi, is still willing to prop up the U.S. dollar via massive purchases of Treasuries.

 

You, the reader, can see the dilemma.  For all the sabre rattling by our politicians about Chinese currency manipulation, the truth is that China is DOING US A FAVOR by devaluing the yuan vs. the dollar.   If other countries do not prop up the dollar, then the store shelves at Wal Mart, Target, et al are going to be nearly empty and the U.S. government will suffer a partial shutdown!

 

If you want life to be better for the hundreds of millions of Chinese peasants, you need to understand that if their standard of living improves, our standard of living will probably go down.

 

What would it take for workers in BOTH countries to prosper?  The governments must allow currency to gain value when workers produce goods that other people want.  In our case, we must go back to manufacturing consumer goods.  This means less regulation and taxes in addition to having sound money so that small businesses can start more easily and survive more easily.  MILD DEFLATION is reviled by Krugman and Fed Chief Ben Bernanke, but it is the worker's best friend.  What makes the super rich even richer is having inflation transfer purchasing power to them, and having regulation/taxes give them the advantage of economy of scale.  Less government would help the American worker tremendously.  Less government would help the Chinese worker, too, but of course, the Communist system is a built-in hindrance!

Jul 22, 2013 5:13PM
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Time for a little revolution in the PRC.

 

You can do it People! 

 

YOU CAN DO IT!!!

Jul 22, 2013 2:07PM
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Take a look at China's abortion rate. Mix that in with the rest of this stuff. Not good for them.
Jul 22, 2013 1:10PM
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China faces 2 walls:  fewer peasants migrating to the cities and new workers entering into the economy at a lower rate than they will be retiring and leaving.  This doubles the blow to the pool of labor causing it to shrink faster.
Jul 22, 2013 5:13PM
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 china is trying to switch its economy from manufacturing to consumption economy , so producing cheap low end goods should be no more. why the hell they keep saying their economy going down, stupid journalist. you cant be a serious country if u keep producing cheap goods for  a lifetime.
Jul 22, 2013 8:17PM
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History repeats itself. 
Bitter lesson:  "Two Wongs don't make a Wright"   (Belly solly could not leesist.)

Jul 22, 2013 4:36PM
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Hey China ....... F you China.
Ya that's right.
Jul 22, 2013 2:30PM
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If China had more of a Hollywood, it might experience more temporary success through being able to prop up various products and oversell them such as we have done here in the states. I suppose our Hollywood will always be the factory that manufactures stars with personas and self-images that unfortunately often fall upon unsustainable crutches and eventually fail. Any person who can gain success in Hollywood and sustain a career without crashing from abuse has got to be very resourceful and talented. My hat is off to such people. After all, it seems that society, even the parts that are not Hollywoody, continues to repleni****elf with lunatic fringe practically unchecked, especially until we are 25 years old, then the main wildebeest crossing is over with. There are now at least 100 more communities like Beverly Hills in California and the states, but just with out the cameras and acting profession.
Jul 22, 2013 2:25PM
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Laughs uh huh the difference is: They find the "teabag" not Starbags...Work like the devil...Don't piss and moan..Sell there stuff dirt cheap..m****duce..it And soon we'll be looking at our credit cards and they will say MADE IN CHINA...Like everything else..? We use today..! There is no..problem..They are going to win..And if you think...I'm joking...Japan is following their lead. Go open the door on a 350Z And it clearly say's made in japan..Per capita they are the largest manufacturing asset in the world...? I'm sold..I'll take 2..They are like ants..so busy building a better America..that someday they will own it. I might not see the day ..but I see the light..! What's it say made in china..? To why me...Laughs your American built car that's got half of the world in it in parts might stall,..and go nowhere.?.Heck you could shove the whole place into the ocean,, And next week their back in Biz incredible..!!! People..!
Jul 22, 2013 1:24PM
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This is a crock..NPR just said this morning..How it was experiencing vigorous economic growth..? I not buying this story for a minute..;P
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