China risks a Japan-style generation of economic stagnation if it fails to adopt reforms to compensate for the ageing and shrinking of its workforce, which pushes up wages and heralds the end of the era of cheap Chinese labour.
The only answer is to change China's growth model to one focused on innovation and productivity from cheap labour and capital, said Cai Fang, director of the Chinese Academy of Social Science's institute of population and labour economics and a lawmaking member of the National People's Congress.
"China's demographic dividend is set to disappear soon," Cai told Reuters in a recent interview at his central Beijing office. "At that point, the high-growth model will become invalid as the source is gone."
With China's 1.35 billion population structure increasingly resembling a demographer's nightmare--rapidly ageing with too few babies born--the hitherto potent economic combination of a plentiful supply of adult workers with few dependents could turn on its head.
Chinese government statistics show that the proportion of the population aged between 15 and 64 fell to 74.4 percent in 2011, the first fall in a decade.
"Japan's demographic dividend disappeared in 1990, and the Japanese economy stagnated ever since," Cai said.
"China has to improve productivity, if it can't, then there will be visible economic slowdown--in Japan, the growth has been stagnated below 1 percent for two decades; in China, a growth rate of 4 percent would be stagnation," he warned.
But he said companies, not government officials, should take the lead in looking for new growth sources. If Beijing can resist the urge to intervene, China may find new advantages through the "destructive creation" of the market place.
Cai said government officials at both a central and local level sometimes got in the way of that process.
"In past years China's potential growth rate has become lower, though the actual growth rates were high, simply because of heavy government intervention--that's absolutely unsustainable," he said.
LABOUR CHALLENGES
Steadily rising wages--up in double digit percentages for years and expected to stay that way for the foreseeable future--is one sign of China's labour challenges.
There has also been a stream of media reports of factory owners, and even provincial members of China's ruling Communist Party, desperately trying to woo workers with pay hikes, free accommodation and even all expenses-paid weekend breaks.
"Total factory productivity used to be a completely foreign word for Chinese local cadres, but now some of them are even trying to use that as a performance assessment benchmark," Cai said.
"As labour shortages worsen, many local governments are trying to make their places more livable by covering migrant workers with public services like social security," he added.
Cai said the watershed moment for China was in 2004, when he believes the economy passed the "Lewis turning point", named for Nobel prize-winning economist, Arthur Lewis, whose theory of economic development is a focus for investors and policymakers.
It postulates that once all excess labour in a developing economy has been absorbed into the workforce, further capital investment puts wages on a permanently upward track.
China passed a more clear-cut landmark in 2011, when official data recorded more people living in Chinese cities than in the countryside for the first time.
"Labour cost will keep rising till the day when rural and urban income in China are fairly equal," Cai said.
Those costs have got some way to go, as China's statistics agency says per capita rural income in 2011 was less than a third of 23,979 Yuan in urban areas at 6,977 Yuan.
"If you can successfully cross the period, you can enter the high-income level, but if you can't make the leap forward, that is full of peril. The reality will be a middle-income trap," Cai said.
