Morningstar Magazine - June/July 2017 - 62

Spotlight: The Future of Investing

4
3
2

A falling household savings rate, combined with
a rising household income share of GDP,
1
should boost China's very low household
0
consumption share of GDP (38% in 2016 compared
0 to a middle-income5,000
10,000
country norm of around
GDP60%
per )capita,
PPP
(constant
2011
international
$) in
and drive household consumption growth

Urbanization

While far from over, farm-to-factory migration will
slow considerably.

to urban) and sectoral (from agriculture to industry
and services) labor reallocation go hand in hand.

This process tends to lose steam as a country
15,000 and economic 20,000
30,000
Urbanization
growth have been 25,000 climbs the income
ladder. Low-income
countries with large agricultural workforces can
linked since the founding of the People's
Republic in 1949. For the first 30 years under the
the years to come, even as the economy slows. We
reap enormous productivity gains by transferring
Communist Party's rule, China saw little of
expect household consumption to grow at an
labor from farms to cities. Middle-income countries,
either. In 1960, 20% of China's population lived in
average of slightly less than 6% over the next 10
with smaller slices of their workforce engaged in
years compared to GDP growth a shade under 4%.
cities. Two decades later, in 1980, only 19% did.
farming, cannot. Consequently, labor migration
Then as central planning and stagnation
and urbanization both tend to slow as incomes rise.
gave way to reform and growth, China urbanized
A falling household savings rate will drain the pool
Japan
Korea forThailand
Vietnam
Taiwan at a spectacular pace. According to official
Fertility
Totalclose
(Births
Per Woman)
of funds available
investment spending
ChinaRate,
appears
to exhausting
the seemingly
figures, the urban population expanded
( E X H I B I T 3 ). Households contribute roughly half of
limitless pool of "surplus" rural labor7 that
from 191 million in 1980 to 793 million in 2016,
fueled rapid urbanization and productivity gains
national savings and are a major net lender to
6 is
in the reform era. The Chinese economy
boosting China's urbanization rate to 57%.
China's heavily indebted corporate sector. To a
far less dependent on agriculture than it had
great extent, the magnitude of China's investment
been when the urbanization process5 kicked
The narrative arc of reform-era China certainly
boom has been made possible by rapid
off in earnest. As of 2016, agriculture accounted
suggests a strong connection between
demographic transformation. Absent a high
4 typical
and rising support ratio, it's inconceivable that
for less than 9% of China's GDP, fairly
urbanization and economic growth. But the extent
China's
current
fertility
rate
is
similar
to
the
historical
experience
of
Japan,
of a middle-income country. Following massive
China's savings rate would have been high enough
to which urbanization has "caused" economic
Korea, Thailand, and Taiwan-none of which enforced compulsory birth control.
migration from rural to urban areas,3a much
to sustain the country's increasingly profligate
growth, or vice versa, is far from obvious.
smaller share of China's workforce is engaged in
level of investment. As the support ratio
Correlation does not establish causation. Rather,
falls, domestic funding will dry up, and China's
farming-likely about 20% based on2 academic
urbanization and economic growth both
are byproducts of labor migration from the largely
high investment share of GDP (45% versus a
studies that adjust for the overcounting of
China
had
unusually
low
fertility
as
a
poor
country-similar
to
middle-income country average of about 25%) will
rural agricultural sector to the largely urban
agricultural employment in official statistics.
1
Vietnam, which also maintained strict family planning laws.
come back to earth. While investment spending is
industrial and service sectors. Moving workers
0
likely to5,000
remain high in absolute
terms, we
boosts
Data30,000
on migrant labor also suggest China's rural
10,000
15,000from farms to factories
20,000and storefronts25,000
expect investment 11
growth
to average
productivity, expands economic output,
labor surplus is drying up. Labor migration
International,
$) less than
1% through 2026.
and urbanizes the population. Spatial (from rural
has slowed meaningfully in recent years to
4.2 million in 2016 from an average of 10.9 million
in 2010-12. The aging of the migrant workforce
EXHIBIT 2
points to a similar conclusion. The population
of migrant workers under 30 years old has been
Graying China The country's unusually high demographic support ratio is falling.
declining since 2008, slipping from 104 million
to 92 million. In this case, the data would seem to
Support Ratio
China
Other Countries
support anecdotal evidence of a barbell age
3.0
distribution
in China's rural villages: children and
2016
older adults with no younger adults in between.
2026
2000
2.5
The tendency for urbanization to decelerate among
middle-income countries like China is also
evident in the global relationship between income
2.0
and urbanization. The link between urbanization
and income is not linear. A country that doubles
1.5
its GDP per capita from $2,500 to $5,000 is likely to
see a 31% increase in its urban population.
Bubble size represents population.
1.0
Doubling incomes again to $10,000 is accompanied
0
10,000
20,000
30,000
40,000
50,000
by a 24% growth in the urban population. The
GDP Per Capita, PPP (Current International, $)
next doubling creates only a 19% increase. China
traversed the steeper portion of the incomeSources: World Bank, UN Population Division, Morningstar. Data for other countries as of 2014.

62

Morningstar June/July 2017



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