China’s demographic perfect storm: the ultimate growth killer23 July, 2012, 11:31. Posted by Zarathustra
Quite a while ago, we became quite interested in the demographics of China. We noted that working age population will shrink within a few years if not already shrinking, and total population of China is projected to hit the peak within 10 to 15 years. In short, the Chinese population will shrink and become older in a very fast rate. In fact, at a much faster rate than the West thanks to the one-child policy. Not to mention that China’s demography now is quite similar to that of Japan in early 1990s (see charts below), which was one of the big reasons that made us become pessimistic about China, not just in the short-run, but the long run.
The idea that the so-called “demographic dividend” is coming to an end for China is not a new one. Yet not many people are sufficiently aware of the consequence of ageing (and shrinking) population. Population ageing poses a headwind to asset prices, real estate in particular. Population ageing is somewhat associated with lower inflation (if not downright deflation) and lower economic growth. All these seem to be totally opposite to some of the now-conventional wisdom that China’s growth potential will remain at 7-8% at least for another decade or two, or that China will be an “exporter of inflation”, so to speak, instead of a disinflationary force in the past decade or two.
|Source: UN Population devision|
Nicholas N. Eberstadt published a paper some months ago on global demographic trends to 2030. In his research, he noted that not only the Western developed world is ageing as we all knew, but also the emerging markets. “[T]he demographic constraints on many of today’s ‘emerging markets’ – rising economies such as China, Russia and India, the places that are widely expected to serve as increasingly important engines of global growth in the decades immediately ahead – are in any case both more serious and more intractable than is generally appreciated” (p. 17).
For China specifically, Nicholas N. Eberstadt even describe the situation as a “demographic version of ‘the perfect storm’” (p. 19), and that raises some serious questions (as we have done for the past 2 years, almost) on whether the conventional wisdom of a 7-8% growth per annum for another decade is realistic.
To summarise, there are 4 big factors, according to Eberstadt, that will contribute to coming “demographic perfect storm” which implies a future growth rate which will be “dramatically smaller” (our emphasis).
The ﬁrst is the end of labour force growth. Over the past three decades of hyper-rapid development in China, the country’s working age population rose by over two-thirds – growing by an average of about 1.8 per cent a year. By contrast, as we have already seen, China’s total working age population is set to fall between 2010 and 2030. Furthermore, as noted above, China’s manpower pool will be ageing over these years; in fact, by 2030, there would be more than four older (50–64 years) prospective workers for every three younger counterparts (15–29 years) – a complete inversion of the current ratio. With a smaller and much greyer Chinese workforce on the horizon, sustaining the growth rates of the recent past would be a truly counter-intuitive proposition.
Secondly, there is the broader issue of rapid and pervasive population ageing. The country will be experiencing a population explosion of senior citizens over the next twenty years, progeny of the pre-population control era. In 2010, about 115 million Chinese were 65 or older; by 2030, the corresponding number is projected to approach 240 million – meaning that China’s cohort of senior citizens would be soaring at an average rate of 3.7 per cent per year. Meeting the needs of its rapidly growing elderly population will undoubtedly place economic and social pressures on China that no country of a comparable income level has ever before had to face.
Third, in the decades immediately ahead, China will see the emergence of a growing host of essentially unmarriageable young men. This outcome will be the all but inescapable arithmetic consequence of the gender imbalance that has accompanied the country’s ‘One Child Policy’ – while ordinary human populations regularly and predictably report 103 to 105 baby boys for every 100 baby girls, China’s ofﬁcially reported sex ratio at birth (or SRB) was almost 120 boys for every 100 girls in 2005. This imbalance between the numbers of little boys and little girls in China sets the stage for a ‘marriage squeeze’ of monumental proportions in the decades just ahead. How will China fare with a growing army of unmarriageable, underprivileged, and quite possibly deeply discontented young men in its midst?
Finally, China faces the prospect of truly revolutionary changes in family structure. A new family type is in the making in China today: only-children begotten of only children. Until now, China has been a ‘low-trust’ society; given the risky environment in which business must take place, people have relied heavily upon trusted social networks (guanxi) largely composed of blood relatives. In China’s most important economic centres, however, the kinship networks that have lowered the risks and transaction costs of business are rapidly eroding. Unless China can come up with serviceable institutional substitutes – and quickly – economic performance in China may be adversely affected by this rapid transformation of the urban Chinese family.
(pp. 19 – 20)
The author concluded that although there are ways for China to further enhance productivity that could promote growth, China is facing serious demographic challenges “that are not generally as yet appreciated, apparently even by Beijing’s leadership”, and we have to be prepared for a China which, in the next 2 decades, will grow at a much slower rate than what is generally expected.
Eberstadt, N. N. (2012), LOOKING TOWARDS 2030: A NEW WORLD COMING INTO FOCUS. Economic Affairs, 32: 17–25.