China’s Demographic Time Bomb

The 21st century will be the century of old age, where declining birth rates meet longer life expectancies. Nowhere are these demographic shifts occurring as quickly as in China, which is facing demographic challenges that threaten to slow its long-term expansion.

China’s demographic headwinds stem from its ‘one child policy’, which was brought into effect in 1979 and is credited with preventing around 400 million births from 1979 to 2010. This policy initially produced a population pyramid optimal to economic growth – that is, where the largest segments of the population were neither young nor old, but in the middle (i.e. working age).

This relationship is shown in the below chart, which maps China’s dependency ratios – i.e. the ratio of the non-working population, both children and the elderly, to the working age population.  As you can see, the precipitous fall in China’s birth rates from the mid-1970s caused a sharp fall in the dependency ratio which, other things equal, increased China’s growth potential.

However, the demographic blessing provided by the one child policy is beginning to turn into a curse. As China’s population ages, an inverted pyramid is beginning to develop, whereby too few workers might be left supporting an army of retirees.

In many ways, China’s demographic trends are closer to its developed nation counterparts. Of its 1.33 billion citizens, 12% are currently aged 60 plus. However, over the next two decades the retired segment will grow rapidly, with those aged over 60 years doubling to around 24% of the population (see below chart).

Marshall Meyer, a professor of management at Wharton University of Pennsylvania, recently described some of the potential implications arising from China’s ageing population.

Thanks to the inverted pyramid…fewer workers will be available to expand manufacturing output as the number of retirees gets larger. In addition, China will have to spend more on social security and medical care. Yet under the current system, it is already “very hard to collect benefits,” suggesting that “a lot of people will have to draw down on their savings.” Little support from family members can be expected in a society where there is one grandchild for every four grandparents, he adds, which means that the continued aging of China “will put [significant] stress” on its society.

Meyer predicts that the Chinese workforce will start to shrink in absolute terms in 2015. Already, he notes, younger workers — those under the age of 25 — are declining in absolute numbers. All other things being equal, when the percentage of older workers increases, labor costs increase, since older workers are less productive in manual jobs…

So far, China’s growing prosperity has been based largely on its ability to manufacture lower-end products at competitive prices. But as costs rise in China, the country has to move up the value chain…

To date, China’s economic model has been based largely on its abundant and low-cost supply of labour, which has enabled it to become ‘manufacturer to the world’.  However, if China Bears like Jim Chanos and Vitaliy Katsenelson are correct, and China’s manufacturing margins are already razor thin, then the gradual reduction of labour supply stemming from its ageing workforce could eliminate China’s traditional comparative advantage in the cost of labour, possibly resulting in it losing its manufacturing base and/or exporting cost-push inflation abroad.

Whilst demographic shifts are inherently slow moving and less of an immediate concern than other issues afflicting the Chinese economy, these longer-term challenges are, nevertheless, significant and are likely to alter the path of China’s economic relationship with Australia.

Cheers Leith

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Comments

  1. There is a major flaw in this thinking, and that is age 60 automatically, and irrefutably, dependant and/or retired. It is this thinking that also plagues Australia where retirement is viewed as an entitlement. I believe this ‘magical’ age rapidly approaching has fueled the bogan boomers into ‘getting rich quick’ via leveraged residential property.

    When the government funded aged pension was intoduced, with eligibility at age 60, average life expectancy for men was 59, women was 62, the pension was 12% of aveagr male wages and there were 27 workers for every retiree. Now men live to 79, women to 86, the pension is 27% of wages and there are currently 6 workers to every retiree.

    It only follows that this eligibility criteria never adjusted to increased life expectancy.

    A much fairer method would be the oldest x% (4% for example) can claim eligibility, with notification of deaths from the respective state departments then recalibrating the age every 6 or 12 months.

    This then gets rid of the entitlement syndrome.

  2. Asset drops in China and Australia (not only property) will occur rapidly as the nations age. The retirees will dump all -ve geared IPs and shares bringing the markets crashing down. This will happen globally but especially in Australia and China and Japan. See link for details…..

    Demographics

  3. Aaron – I agree that there won’t be some specific age that people ‘retire’ as we envisage in the west and become dependent on their family, but they will still be a burden on society.

    From my visit to China last year, I saw a lot of elderly people employed in various jobs that I can only describe as totally unskilled and mostly unnecessary. For example, in Suzhou Industrial Park there are plenty of empty buildings all being swept and cleaned on a daily basis.

    Not that this is unique to China; in Japan I also see elderly employed in such useful capacities as warning people that some footpath maintenance is underway ahead etc.

    It seems a cultural thing to give the person some self esteem, even if the work is clearly unnecessary. Still, even with this scheme the burden of supporting the nominal four grand-parents may be placed indirectly on the grandchild either through increased taxation or generally higher costs for business.

  4. Yep, big problems for China – they will grow old before they grow rich, probably starting mid to late this decade based on peak spending at 44/45 years in China, earlier than the western world (47/48).

    Japan is a lesson in advance … their birth rate plummeted after an initial small spurt (LOL) post the second world war. Forward project the top to the bottom of the declining birth rates and you get the 1990 – 2010 “super recession” – using a 43/44 year lag. The birth rate started increasing again from the late 1960’s which will provide a strengthening home market once again (but shallow), thereby stimulating overall GDP – but nothing like the birth increases that occurred into the WW2 (which set the country up for the boom in the 80’s.

    Make no mistake, it is the home market that is the critical determinate in a country’s overall output/growth profile – even China will succumb to this (I am assuming 25% is export, BTW Japan was running in the high teens in the late 1980’s and yes their exports were booming due to their enormous competitive advantage of better product at better prices, however that did not save them from a 20 year period of deleveraging/asset deflation “super recession”).

    As I have posted before, the western world is at the start of a 10-12 year period of deleveraging/deflationary period … which will effect the third world countries as well – and probably harder as these countries do not have the reserves to call upon (China may have 3 trillion USD in foreign reserves, but the question is who has this one and who controls its use? The State is the obvious answer as I doubt the average business has the know how given the razor thin margins they operate on, don’t even bother thinking about the average worker … what a mess coming).

    Phil

  5. Why talk about an ‘aging population’? Why not talk about what is really happening, which is a slow genocide?

    Australis and China booth have similar birthrates (around 1.8-something children for every two adults).

    Have a look at this map of world poverty… http://en.wikipedia.org/wiki/Total_fertility_rate

    Basically the more red, the more poverty… But the surprise is that it is a map of FERTILITY – how many children are being born.

    Too low population growth = initial wealth, but leads to a bust and long, painfull decline, like Japan.

    Too high population growth = poverty.

    You know how our government seems unable to fund hospitals, schools and roads, and this is with our population failing to produce enough children to replace ourselves… imagine the problems of fundiong these essential services if the population was not declining, but trippling every twenty years… no wonder they are poor. Worse than schools and hospitals, they somehow they also need to find more farmland too!

    50 years ago, perhaps we could have ended poverty. But now there are so many more poor that the problem is so much bigger. For example, there are 60 million shanty-town dwellers in India alone, and only 20 million Australians… Let alone Indonesia, the Pacific Islands, New Guinea… What about Africa? Sth America? etc etc…

    Why is China becomming so rich and powerfull? The one-child policy. It means they can finally afford to catch up with the infastructire and education that nations need to get ahead and build wealth.

    I don’t like the ‘one child policy’, but Thailand and surging Iran (Think nuclear power) also have zero-population growth due to marketing, free contraception and free choice. It’s not really the feminist idea that educating women reduces population growth (think Iran, they’re not keen on educating women)…

    What succeds is explaining to people that too many kids leads to poverty, and long-lasting free contraceptive implants. Eventually compulsary education and urbanisation also drive down birthrates, because they make kids expensive. This tends to come along at the same time as education for all, which creates the feminist myth that only educating women decreases birthrates… it does, but that’s only a small part of the picture.

    On the other hand, why is the ‘aging population’ such a bad thing here in Australia? Surely it means we are living longer, and isn’t that a good thing?

    The problem is not an ‘aging’ population, it is that we are suiciding… failing to produce enough kids to replace ourselves.

    Here we need to give tax reductions for kids so middle class parents can afford the kids we want. For example income splitting between the parents and kids.

    Those on welfare are pumping out kids like there is no tomorrow because of the welfare bribes to have lots of kids. Meaning that single mums are pressured into having more kids than they can look after. And the payment incentives which ensure that few get married, as this reduces their welfare payments.

    Australian men don’t want to become fathers. Men don’t celebrate buck=s nights anymore, and Kings Cross is full of hen’s nights. We have the highest rate of vasectomy in the world.

    Every man knows that marriage means long years of hard work, followed by divorce. And divorce means that his kids are fed to the lawyers. So men are simply saying ‘No!’ to marriage and fatherhood. Tragically, city offices are full of single 30-something professional women who can’t get a husband.

    So we need also to make divorce fairer, because Australian men don’t want to become dads… because they are afraid of having their kids stolen by divorce lawyers.

    • PartTime – Great work. You have hit so many nails on the head. The social issues which come from so many government polices are massive and you touched on a number of them. These types of thoughts are often hard to quantify and so very few people even try to. It’s clear that you have both an understanding of economics but more importantly an understanding of people.

    • well, it is not certain that Japan is in decline. It depends on the metrics. If one follows the dogma of infinite growth then perhaps that is so.

      but others may value other things (than spending time at work and in traffic), such as just sitting and being comfortable, being able to make a few things and enjoy your life.

      you may value the rat race but I don’t.

      I do agree that there is a balance and that over population is an issue (despite it being lambasted)

  6. Long time reader but have not posted before.

    I’m not sure where you are going with this Leith. It’s common business dynamics that production will move to where the least cost based are. Furthermore, it is already pretty apparent that the Chinese have been moving their factories to places like Vietnam and Laos in the last couple of years. Regarding the ageing population China is similar to the rest of the developing world…. Similar to the West, China will simply move up the value chain. However unlike the West, Chinese corporations are owned by the State so even with production moving offshore most of the benefits will flow back to China (and its corrupt officals).

    • Crocodile Chuck

      “Similar to the West, China will simply move up the value chain”

      Smurf, can you name one branded Chinese manufacturer that could attract a premium for its products? NB Other than Haier, Huawei Technologies (which copy designs and technologies from Western co’s) and Lenovo (with its US heritage).

      ?

  7. Pretty cool article, I learned some stuff I didn’t know about. I just happen across your blog; it’s pretty informative. I’m going to have to read some of your other articles.

  8. China’s birth rate is less than ours. A study by the UN population division found that over the five years form 2005 to 2010, 12.4% of every 1,000australian women gave birth, whereas only 11.2% of every 1,000 chinese women gave birth. http://en.wikipedia.org/wiki/List_of_sovereign_states_and_dependent_territories_by_birth_rate

    As of june 2010, population growth rate was 1.7% p.a. Australia’s population reached 22,342,000 by the end of June 2010, growing by 377,100 people over the year. Net overseas migration accounted for 57% of this growth, with the remaining 43% due to natural increase (births minus deaths).
    http://www.abs.gov.au/ausstats/[email protected]/Latestproducts/3101.0Media%20Release1Jun%202010?opendocument&tabname=Summary&prodno=3101.0&issue=Jun%202010&num=&view=

    the present birthrates throughout the middle east and most of africa are incredibly high. they have far more young than old people.

    our tax system can be changed. we do not need to tax income at all, so the age groups are not so important.
    http://www.prosper.org.au

  9. Pellicle says: “I don’t see that scandinavia is falling into decline; despite their low fertility rates.”

    Actually, scandinavia has the highest fertility rates of western Europe. And they also have Nth Sea Oil).

    Long ago they recognised that it takes two people to make a child… so they have some great things like two-year long, ‘use it or lose it’ Paternity leave, paid at 80% of previous salary. This means that parents’ not only mothers, get parental leave and men can’t give their entiliement to their wives. Importantly also, divorce is less destructive for children, and shared parenting is common.

    scandinavian men are queuing up to become fathers, the opposite of Australia (Well, I exaggerate)

  10. Chuck,

    Not at the top of my head.

    However, it is better to think about the long term. Less we forget, both Japanense and Korean products were considered inferior in the 70s and 90s respectively.
    Where are they now?