China: The explosive mix of population ageing and overcapacity

There is currently an interaction between two mechanisms that is generating a very dangerous situation: Population ageing is leading to significant labour market pressure and to a rapid rise in wages and unit labour costs; The existence of overcapacity eliminates Chinese companies’ ability to increase their prices in response to the rise in their costs. Since labour costs are rising rapidly while prices are not , profit margins and earnings are falling and Chinese companies ’ financial situation is deteriorating sharply , especially as they are borrowing not to invest , but to offset the deterioration in their earnings .