China Faces Upgrade-or-Die Deadline as Supply of Labor Dwindles

“I have to find a new way,” says Lin, 29, who is turning his Dejin Textile Co. into an online fashion retailer to cut costs and keep the business from closing. “Wages are going up, up, up. If we don’t like somebody’s work we can’t say anything, in case they leave.”

China’s three-decade-old, one-child policy will accelerate declines in the workforce, forcing companies to upgrade to higher-value products in the way Japan did in the 1960s and 70s. China may have as little as five years to make the transition to avoid a slump in economic growth, according to Sun Mingchun, an analyst at Daiwa Capital Markets in Hong Kong and former economist at China’s State Administration of Foreign Exchange, part of the central bank. He said growth may decline in 2016-20 as low-cost producers fail and investment falls away.

“This is the big issue in China on which everything will turn,” said Barry Eichengreen, an economics professor at the University of California at Berkeley and former senior policy adviser to the International Monetary Fund, who contributed to the 2010 book: “Emerging Giants: China and India in the World Economy.” “China needs to really accelerate this transition.”

The pool of 15 to 24-year-olds, a mainstay for factories making cheap clothes, toys and electronic products, will fall by almost 62 million people to a total of 164 million in the 15 years through 2025, United Nations projections show. The demographic shift is a result of the one-child policy implemented in 1979.

Clothes and Furniture

Products such as clothes, shoes and furniture that the General Administration of Customs doesn’t classify as “high- tech,” accounted for 68 percent of China’s exports last year, or $1.09 trillion, little changed from the 71 percent share in 2005, when they were worth $544 billion, the agency’s figures show. Exports account for more than a fifth of China’s gross domestic product. High-tech industries include aerospace and aviation, medical instruments, software, computers and telecommunications.

“The low-end manufacturing industry is tough and will be getting tougher day by day as both labor and land costs are rising,” says Xu Hui, 39, the owner of Wenzhou Dazhan Photoelectricity Co. in Zhejiang province, south of Shanghai. She’s switched to making LEDs and solar parts after starting off in the 1990s manufacturing sunglasses that sold for a dollar or two. “Either you go for high-tech, high value-added industry or you just perish.”