China’s Economic Base Is Shrinking, And Dramatically So
Beijing has informed the world that for the first time in 70 years the nation’s population declined – by some 850,000 since the last census. It seems set to stay on this trajectory, too. United Nations (UN) demographers see future declines, from a population of 1.4 billion presently to 1.3 billion in 2050, to 800 million or so by the end of the century. This demographic reality promises to constrain the nation’s growth prospects severely, not immediately but with growing intensity over coming years. It further promises to compound economic ill effects by raising debt levels in this already debt-heavy economy. And there is little Beijing can do to mitigate these unwelcome implications.
The crucial demographic consideration, for economics at least, is the relative size of the nation’s working-age population. Because Beijing for decades imposed a one-child policy on Chinese families – for the last 45 years in fact until recently – the nation now faces a relative paucity of workers to replace the huge generation that is now retiring. The numbers of those of working age – by convention, between the ages of 15 and 64 – have in fact hardly grown at all since 2010. But the older population of retirement-age Chinese has grown a whopping 53 percent, increasing from 9 percent of the total population in 2010 to 13 percent at last measure. There are as a consequence, barely 3.5 people of working age today available to support each retiree, down from about 6.5 in 2000 and 5.5 in 2010. And that figure is expected to fall below 2.3 by 2030 and even lower in the years following.
To grasp the economic ramifications of this situation, consider the burden on these few workers. Each must support himself or herself, personal dependents, and about a third of everything each retiree needs. No three-some workers anywhere, at least on average, are productive enough to shoulder this need. The economic strain will be that much greater than the raw numbers imply because the large aging population will necessarily siphon off workers from everyday production to medical and other care needs. China will have little surplus production for the investments required for economic growth, most especially the grand projects for which China has become famous and which have so contributed to the country’s former, impressive pace of growth.
What is more damaging is that these demographics will have significant and adverse financial implications as well. The pension needs of these retirees will force considerable borrowing requirements on local governments as well as Beijing. China already carries a bigger debt burden than most countries, including even the United States. At last measure all debt – public and private – amounted to the equivalent of about $52 trillion, verging on almost three times the size of the economy. To be sure, Washington carries a bigger debt burden than Beijing does, but that is because Beijing off loads borrowing needs — to support infrastructure spending for instance — onto local governments. Pension demands will increase this burden still further and unavoidably crowd out the growth-fostering projects that in the past have done so much for China’s development.
And there is little Beijing can do to offset these ill effects. A few years ago, the authorities finally awakened to the potential economic damage of the one-child policy. They rescinded the law and allowed larger families. But even if Chinese people had immediately taken advantage of that more liberal environment, it would be 15-20 years before the change could have effect on the relative size of the country’s working-age population. As it is, the nation’s fertility rate has not risen in response to the new law. Nor is China likely to see a wave of immigration to enlarge the ranks of the working aged. On the contrary, China regularly experiences more out than in migration.
The only other avenue open for relief is in worker productivity. To this end, Beijing has emphasized the development and adoption of artificial intelligence (AI) and robotics. Indeed, China has become a world leader in these areas. No doubt in time these trends will substitute algorithms, computers, and machines for labor and make the country’s relatively limited working population more productive than it is today. AI and robotics can also help by limiting the need for physical labor and thereby enabling Chinese to work at older ages than in the past. But these things can only go so far. However much these efforts can mitigate the strain imposed by demographic realities, they cannot correct for them entirely, leaving China facing slower growth with less room for grand investment projects than has been the case until now.
The problem is a paucity or young people.
www.forbes.com
