Euro falls as economy contracts and inflation slows, China faces demographic tsunami

The euro area remained the centre of investors' concerns on Wednesday. Bloomberg reports:

The euro fell from almost a one-week high versus the dollar as European inflation slowed and Italy’s biggest bank said it needs to raise more capital, fueling bets Europe’s debt crisis is worsening.

The 17-nation currency dropped toward an 11-year low against the yen as a 7.5 billion-euro ($9.7 billion) share offer from UniCredit SpA spurred concern European banks may struggle to raise more capital. The euro slid versus most major peers after El Pais newspaper said the Spanish government helped the Valencia region make an overdue payment to Deutsche Bank AG. The pound climbed to a 15-month high versus the shared currency.

Eurozone economic data, though, were relatively positive. The euro-area composite index rose to 48.3 in December from 47.0 in November, according to a report from Markit Economics on Wednesday, above an initial estimate of 47.9.

While the composite index does indicate that the economy is contracting, inflation in the euro area is finally easing. Another report on Wednesday showed that the inflation rate in the euro area fell to 2.8 percent in December from 3.0 percent in November.

Economic data from the UK on Wednesday were mixed. The Markit/CIPS construction PMI rose to 53.2 in December from 52.3 in November and mortgage approvals rose to their highest level in almost two years in November but net lending sank to its lowest since June.

The US continued to provide positive data on Wednesday, this time in the form of a 1.8 percent increase in factory orders in November. However, orders for non-defense capital goods excluding aircraft fell 1.2 percent.

In China, the property market continued to cool in December, with residential prices dropping 0.25 percent last month from November according to SouFun, the nation’s biggest real estate website owner.

However, China may soon have to deal with a bigger long-term problem. Bloomberg notes that China faces “a demographic tsunami”.

... The latest government census shows 178 million Chinese were over 60 in 2009. That figure could reach 437 million -- one third of the population -- by 2050, the United Nations forecasts. While the elderly were looked after in the past by their children, urbanization and the nation’s one-child policy have eroded the tradition of family care...

China’s challenge is similar to that faced by Japan in the 1990s, with one essential difference: China will grow old before it gets rich. With tens of millions of parents left to fend for themselves, the government set up a National Committee on Aging to try to devise a comprehensive strategy (CHGE7) to ensure their health and comfort.

China's shifting demographics will eventually result in a reduction in its trade surplus as workers will increasingly demand higher wages and thus erode its low-cost advantage. Reuters reports the latest example:

Shenzhen, a major manufacturing hub in southern China, will increase its minimum wage by 13.6 percent in February despite warnings from factory owners the move could deal another blow to exporters already reeling from a sharp drop in Western orders.