Mainland China’s surging producer prices have fuelled fears of spill-overs into consumer-price inflation. But structural forces determine trend inflation – in particular the 50m-plus university students who will graduate by 2025. This influx of skilled labour will limit wage inflation, but also enable Chinese firms to innovate and boost productivity, which is itself a disinflationary force.
China’s infrastructure boom is well known. Less appreciated is the decades of investment in higher education. More and more young people are going into tertiary education, with over 10 million university students set to graduate next year – over 50 per cent more than a decade ago.
China’s number of students in tertiary education is the highest in the world, exceeding the student populations of the US, Japan, Germany, South Korea and the UK combined.
The surge in the supply of skilled labour is likely to mitigate wage inflation. Already, university graduates’ starting salaries are rising less than the growth of average labour productivity, reflecting intense competition for jobs.
While mainland China’s overall unemployment rate has fallen to pre-pandemic levels, at 5 per cent, the rate for 16 to 24 year-olds exceeds 15 per cent. Some graduates unable to find skilled jobs are taking temporary low-skilled work such as home deliveries – or deferring employment by enrolling in masters and doctorate programmes.
Mainland China’s research and development investment is second only to the US in terms of total spending and, at 2.4 per cent of GDP, is on par with other developed countries. Its innovation has been most pronounced in science and engineering, yielding advancements in higher-end manufacturing products. It now files more patents than the US, even if quality still lags quantity.
This innovation will be boosted by an ample supply of young talent and government support, including tax incentives, new national laboratories, private finance and advanced infrastructure such as 5G, fibre-optic networks, data centres, and electric-vehicle charging stations.
Technology upgrading should bring efficiency gains that enable Chinese companies to climb the global value chain, but also to make more competitively-priced products.
And through foreign trade, this structural deflationary force can have a spill-over effect on inflation in major trading partners, particularly as trade pacts expand commerce.
We have seen this play out before. Mainland China’s entry to the World Trade Organization in 2001 brought with it a large supply of relatively cheap labour as migrant rural workers moved to the cities, giving factories wage advantages. The country quickly became the world’s manufacturer of low-end products including clothing, shoes and toys.
Now the labour advantages are likely to shift to higher-end goods such as cell phones and computers as a steady supply of scientists and engineers enter the workforce. Wages in sectors such as information and communication technology are half, or less, of developed countries’ pay levels – so for the same salary a company can hire two Chinese engineers.
The labour-cost advantage would be reflected in the price of exports, increasing their market share but benefiting global consumers. The continued boom in the supply of university graduates should thus play a deflationary role both domestically and abroad in future years.
First published 6 July 2021.
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