Richard Koo On Why Labor Tension In China Is Now Set To Explode

In his latest note, Nomura economist Richard Koo turns his attention to China, which is probably the source of the most economic interest and mystery these days.

Just last night we got more data confirming that the Chinese economy is slowing, and people are asking whether this is "it", the big hard landing that people have been predicting for years.

The topic is so multi-faceted, that there's no one answer, let alone one question.

But Koo, in his note, comes down clearly on the side that says China is in urgent need of real structural reform (a diagnosis he certainly isn't advising to the US, Europe, or Japan, where he famously argues for more fiscal stimulus).

Koo says academics are referring to the last decade, under Hu Jintao, as China's "lost decade". Unlike Japan though, this is not the result of mediocre growth, but rather the lack of reform.

One fascinating chart that Koo points to, which he says is ominous for China, looks at the rate of migration into Tokyo, from several decades ago, and the frequency of labor disputes (strikes).

As the pace of migration into Tokyo began to slow, workers gained more bargaining power, and as such, the number of strikes exploded.

Per Koo — and many other economists — China is seeing the same thing. The once endless supply of rural labor is coming to an end, and workers are gaining bargaining power.

As such, China is likely to see the same surge in labor disputes as Japan saw (Korea had the same thing).

This point, at which the supply of endless labor comes to an end, is called the "Lewis Turning Point" and it's something that a lot of people are talking about these days, including Paul Krugman.

Thus the need for actual economic reforms is urgent, as otherwise China will be stuck with an old, broken model, and a lot of angry workers.