China is No. 1, for now

column-John Mangun-OUTSIDE THE BOXIT is now official: China has the largest economy in the world in terms of purchasing power. While the United States economy is still the largest, as measured by total gross domestic product, those are only numbers. The Chinese can buy more stuff than the Americans can. It is all about what you can hold in your hand and not the zeroes at the end of your bank-account balance.

But there are other things or areas where China is ranked first—or second—and not just in terms of air pollution in a capital city.

China’s massive population makes it something like a creature from a bad science-fiction movie that goes around and eats everything is sight. In China 50,000 cigarettes are consumed every second, nearly 50 children are born every minute and five people are executed every day.

About that air pollution: China is now the largest consumer of energy—a title the US once held for 100 years. But that is understandable, considering that 1.4 billion people live in China, representing 19 percent of the global population.

However, there is much consumption that is not directly related to population size. Consider that China makes up 40 percent of the total global demand for cement, iron, coal, steel, lead, zinc and aluminum. The Chinese eat nearly half the pork produced in the world and 40 percent of all chicken eggs.

We think of China as a huge factory, and in some sense that is true. Eighty percent of the toys produced in the world, as well as the 500 million iPhones that have been sold, come from China. China builds 90 percent of all personal computers and 80 percent of all air-conditioners, and makes nearly 70 percent of all shoes. Consumer items aren’t the only things that China produces: Nearly 50 percent of all ships are now being built in Chinese shipyards.

These numbers are truly staggering. China’s economic impact on the world far outstrips its physical size and population. Remember, all those goods it produces used to be made in other countries, and that has led to an economic imbalance that will eventually come to an end.

China’s ability to produce goods much more cheaply has also created a manufacturing imbalance, and it is coming to an end. The sweet-spot demographic of its workforce will peak before 2020. But much more important than that is the fact that China’s cheap labor pool is already depleted, while 200 million Chinese still live in poverty.

Workers at electronics manufacturing company Foxconn went on strike this week. They only comprise a small part of the total workforce, and the undisclosed issues were quickly resolved. This strike would not have been a big deal if it didn’t occur at its factory in the Chinese city of Chongqing.

China has a population-density disproportion: the overwhelming majority lives on the east side of the country, with the Chongqing area as the dividing line. In the west, except along the rivers, the population density is one person per square kilometer; in the east it averages 200 per sq km.

The Foxconn factory is the last outpost of China’s cheap-labor frontier. There are no areas heavily populated with relatively poor people to build another factory with 100,000 employees. In the last 10 years, Chinese wages have increased 12 percent yearly. Wage inflation is slowing, but even at a lower rate, Chinese company profits are being hurt. Consumer expectations for more wealth are very high, and a declining workforce will put more pressure on wages in the years to come.

The rest of the world has fueled China’s economic boom with cheap credit and cheaper money for two decades, and that also is coming to an end. Thus, China’s place on the top is being squeezed from both sides, domestically and internationally.

By 2020 there would be an economic shift, as the golden age of Chinese economic expansion could potentially wind down.

On personal note, if you like to have a signed copy of my book Outside the Box: Mangun’s Broader Look at Today’s Business, you may order directly through my website, www.mangunonmarkets.com.

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