China’s Achilles Heel

By Leith van Onselen

The Economist today published an interesting article about the demographic time bomb that threatens to derail China’s economic development:

Over the past 30 years, China’s total fertility rate—the number of children a woman can expect to have during her lifetime—has fallen from 2.6, well above the rate needed to hold a population steady, to 1.56, well below that rate (see table). Because very low fertility can become self-reinforcing, with children of one-child families wanting only one child themselves, China now probably faces a long period of ultra-low fertility, regardless of what happens to its one-child policy…

Shanghai reported fertility of just 0.6 in 2010—probably the lowest level anywhere in the world. According to the UN’s population division, the nationwide fertility rate will continue to decline, reaching 1.51 in 2015-20. In contrast, America’s fertility rate is 2.08 and rising…

Between now and 2050 China’s population will fall slightly, from 1.34 billion in 2010 to just under 1.3 billion in 2050. This assumes that fertility starts to recover. If it stays low, the population will dip below 1 billion by 2060…

In 1980 China’s median (the age at which half the population is younger, half older) was 22. That is characteristic of a young developing country. It is now 34.5, more like a rich country and not very different from America’s, which is 37. But China is ageing at an unprecedented pace. Because fewer children are being born as larger generations of adults are getting older, its median age will rise to 49 by 2050, nearly nine years more than America at that point. Some cities will be older still. The Shanghai Population and Family Planning Committee says that more than a third of the city’s population will be over 60 by 2020.

This trend will have profound financial and social consequences. Most obviously, it means China will have a bulge of pensioners before it has developed the means of looking after them. Unlike the rest of the developed world, China will grow old before it gets rich. Currently, 8.2% of China’s total population is over 65… By 2050, China’s share will be 26%.

…rapid ageing … means China faces what is called the “4-2-1 phenomenon”: each only child is responsible for two parents and four grandparents. Even with high savings rates, it seems unlikely that the younger generation will be able or willing to afford such a burden. So most elderly Chinese will be obliged to rely heavily on social-security pensions.

China set up a national pensions fund in 2000, but only about 365m people have a formal pension. And the system is in crisis. The country’s unfunded pension liability is roughly 150% of GDP. Almost half the (separate) pension funds run by provinces are in the red, and local governments have sometimes reneged on payments.

But that is only part of a wider problem. Between 2010 and 2050 China’s workforce will shrink as a share of the population by 11 percentage points, from 72% to 61%—a huge contraction, even allowing for the fact that the workforce share is exceptionally large now. That means China’s old-age dependency ratio (which compares the number of people over 65 with those aged 15 to 64) will soar. At the moment the ratio is 11—roughly half America’s level of 20. But by 2050, China’s old-age ratio will have risen fourfold to 42, surpassing America’s. Even more strikingly, by 2050, the number of people coming towards the end of their working lives (ie, those in their 50s) will have risen by more than 10%. The number of those just setting out (those in their early 20s, who are usually the best educated and most productive members of society) will have halved.

China’s ageing ‘problem’ is an issue that I have tackled a number of times before (here and here). Essentially, 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 (< 20 years old) and the elderly (> 65 years old), to the working age population.  As you can see in the charts attached below, 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 will soon turn into a curse. According to the United Nations, by 2015, China’s dependency ratio will bottom-out and then begin rising continually until 2070.

The number of working aged people to dependents is set to almost halve over the 50 years to 2065, from a peak of 1.9 workers to dependents in 2015 to only 1.0 by 2065 (see second chart below).

With the decline in workers per dependent driven primarily by a sharp increase in the Chinese population aged over 65 years from 2015 (see third chart below).

Whilst demographic shifts are inherently slow moving and less of an immediate concern than other issues afflicting the Chinese economy, such as the over reliance on fixed asset investment or the threat of civil unrest, these longer-term challenges are, nevertheless, important and are likely to alter the path of China’s economic development.

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Leith van Onselen
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Comments

  1. From what I gather as well, there is about 100 million more Chinese blokes than girls makeing for a frustrated nation as well !

    however this also feeds into the fertilty loop.

    • Yes, and the same issue is rearing its ugly head in India, mostly in the north. Countries like Thailand with more women than men may make up some of the other side of the ratio, but there’s inevitably a gap there for those who can’t afford to go overseas in the first place.

      That’s also not to mention the theory that nations with an unbalanced ratio are more likely to be belligerents in a war…

    • there is about 100 million more Chinese blokes than girls
      That is undeniably a shortage of girls.

    • Unsustainable population growth.

      An economic system that is supported by ever increasing populations is the ultimate Ponzi scheme.

    • Thanks Lorax.
      My thoughts exactly!

      I dun think everything came out of one-party ruled China was good. But ‘one child policy’ was definitely necessary for the country, and has been a huge success. And it would never have existed if Mao lost the war.

      So I wouldn’t call it Achilles Heel, probably “a recession they have to have”.

      • Wow. People actually support such a policy in a country. I guess some people just think of everything in aggregates. Who cares about individuals..
        Absolutely stunned.

          • Mate, I’m no Green.
            Before you leave a impulsive comment like that, you should really learn more about the Chinese culture.

            The simple reason why they had such a high birth rate before the policy was introduced, is Chinese people want SONS. The more the merrier.

            The key reasons behind that:
            – Sons inherit the family name.
            – Sons bring wealth to the family.
            – Only sons will take care of you when you grow old. (no concept of safety net)
            – Daughters will become someone else’s family after they marry. Plus dowry at the wedding will cost the family a fortune. They are considered a loss to the family from birth.

            Most families will never stop trying until they have a son. And they will keep going for more.

            All this is deeply ingrained in their blood & soul for thousands of years. Without govt intervention, the country was doomed with poverty.

        • China’s one child policy applies to a relatively small portion of the population and this portion is declining. It only applies to major city dwellers who reisided or where born in specified periods of time.

          It is no good thinking of idividuality if the population simply starves because there is insufficient food…

          Another aspect to consider is that ‘one child families’ are somewhat self improsed. City dwellers tend to be wealthier, more educated. Like the rest of the world they then choose to have only one child

          While I find the idea repulsive there are reasons it existed, in an economy and culture that has a vastly different composition and history to ours. This doesn’t excuse ignoring human rights but is important to consider.

          • +1

            5 births per woman in early 1970s
            3 births per woman in 1980
            1.8 births per woman in 2008
            1.54 births per woman in 2011

            76% of the population supports the policy.

            Imagine if they kept going at 3 to 5 per woman since 1979.

            I dun think the West will be willing to pay for the food. China will be just another Africa.

        • Broadly speaking I would think size of populations is generally controlled by:
          1. Some form of control over fertility (e.g. I think a number of nomadic and primitive societies/tribes used to practice infanticide to keep populations relatively stable, or to enhance survival of more robust individuals during hard times).
          2. Overpopulate an area – send overflow to settle (conquer) some other area.
          3. Overpopulate during good times – decrease population by loss of large numbers during hard times.

          Populations are made up of individuals.
          I can’t think of a way that all individuals can be spared when populations become unsustainable in a defined area.
          1. The unborn are targeted (and perhaps also the old)
          2. The ‘other’ are targeted
          3. The weak and vulnerable succumb, although disease can be more indiscriminate.

          On an unrelated topic:
          Why was comments closed on yesterday’s ‘Bugs (Updated)’ post?
          This afternoon I typed a longish exposé of my ‘wasted’ Saturday (yesterday) in TextEdit, only to discover I couldn’t access comments.
          I might be the only person who didn’t know (until yesterday) about the Flashback Trojan affecting up to 600,000 Mac computers worldwide. If so, my comment isn’t necessary. If I’m not the last to know, my comment might provide some useful info for readers.

      • India’s population is gonna surpass China in a couple of decades, if not sooner. And it will be (is?) the perfect example of why China needed that policy.

        Feel free to put individual rights above everything all you want, in a country with a population of only 20 million. But it’s a different story over there in China. It was a choice between ‘one child policy’ or poverty even famine down the line.
        They envisioned that they will still be in power by then. So it’s not gonna become someone else’s problem.
        I think they made the right call on this one.

    • Devil and the deep blue sea! Although population and liquidity inspired develop-destroy growth psychology are probably not as linked as our corporate overlords would have us believe.

  2. Interesting point about China’s unfunded pension liability being roughly 150% of GDP.

    In Joe Hockey’s speech about ‘entitlement’ the other day he spoke about Asia (in particular Hong Kong) as an example that Western democracies like Australia should try to emulate in terms of social welfare. He painted Asian countries as bastions of filial piety where there are “minimal unfunded benefits and entitlements”.

    Seems like he failed to do his research, again.

    • As always… Joe is really not the sharpest tool in the shed and yet now I read that he’s being touted as a more palatable replacement for Abbott.

      I really dread the next Liberal government (almost certainly after the next election); there’s such a lack of talent and ideas that it’s going to be a shambles. Not that Julia has been any better – however at least there’s a willingness to take on multi-billionaires whereas the Liberals seem to be truly in the back pockets of the mega-rich at the moment. Menzies would be rolling in his grave…

  3. Lucky it all has nothing to do with us!!!! We’re still going to get all the cheap goods out of there to keep us living in the style to which we’ve become accustomed in the last 50 years.
    No inflation here …move on!

    Those who think the next 50 years in the western world are going to be pretty much the same as the last 50 years ought really think about this stuff.
    Again my head is sore from beating it against the brick wall in respect of the consequences of all this.

    A few years back in a spare moment I built a population model of a one child policy using varying other assumptions re marriage rates and even within marriage a declining inclination to have children (as per normal as societies become more prosperous), etc etc
    After about 4 generations (memory is faded and I don’t still have the work)the ratio of dependents to workers was frightening… I forget whether it was some ratio of 70 or some such. Carry it on a bit longer and you get stupid things like 145! I presume some other factors would kick in by then!!! Maybe along George Orwell lines.

    • P.S. I’d reckon a real demographer would do a much better job than I did!!!
      I was just messing with numbers after a trip to China during which we observed the spoiled results, in the form of ‘little emperors’, of the one child policy.

      My wife standing in the corner of a factory, watching people who were working really hard sewing one of our products, remarked “So these women are all working like this so that their little darlings can grow up and do the same thing? I don’t think so!!!”

      This was about 12 years ago. Despite the supposed brilliance of the likes of Ken Henry Ben Bernanke and all the rest my wife is a smarter ‘economist’ than all of them!!!!
      A bit of common sense would make a great injection into economics instead of the academic blathering.

    • Flawse. I reckon anyone who has lead a normal, happily oblivious life will need to do a fair bit of reading before understanding the ramifications of this current global financial crisis.
      Most people still struggle to figure out why they should be interested in the European political/economic scene and the standard response to any worry about China is that they have billions of people so they’ll be right.
      There are days when wish I could go back to the happy oblivion and worry less about the world. There is not anything much we as individual can do, apart from trying to protect our savings, try to hold on to our jobs and avoid bankruptcy. Cheerful stuff…
      I have gently mentioned to some younger acquaintances that it might be good to be cautious with getting into large debt. Most of my friends are pretty optimistic about the world and the Australian economy and I hope they are right and I am wrong.

  4. the ratio of dependents to workers was frightening
    I understand that in a modern society about 1% of workers are involved in food production. Wouldn’t it be terrifying if the number of workers (per dependent) dropped and 2% or even 3% of workers were required to put food on the table.
    How could we survive that?

  5. Claw

    Maybe we’d be poorer and happier with our hands in a bit of dirt?
    Just a thought from an old farmer!!!!!!

  6. Fantastic charts Leith,

    It’s not like this is sudden news either, here’s an article from 2004 saying the same thing:
    http://www.smh.com.au/articles/2004/04/27/1082831569621.html

    In fact, the above article reads almost identically to the Economist quote.
    Demographics, and it’s impact on the economy is a topic that fascinates me – the data is all there and doesn’t change quickly, surely it is the best long-range economic forecasting tool available?

    I’m marking 2015 on the calender as the year to watch – if China’s growth rates haven’t come down due to the influence of the euro zone by then, I have difficulties understanding how infrastructure fueled growth can keep up when the dependency-ratio tailwind reverses.

    Also, if you are interested, I have some graphs of the ‘spending wave’ (a concept borrowed from Dent) for Australia over the next 80 years based on ABS demographic projections (made in 2008), which I’ve taken a Keensian approach with (looking at first and second order rates of change). Interestingly, we could be reaching an inflection point in the next year or so, where we go from boomers retiring and subtracting from the ‘spending wave’ cohort, to gen X-ers adding to it. This second wave will carry us through till 2018 or so if I recall correctly. I’m skeptical of what this means given the levels of debt we are already facing, and the current global macro environment, but this could mean a pick up in housing and retail in the near future…

  7. “Between now and 2050 China’s population will fall slightly, from 1.34 billion in 2010 to just under 1.3 billion in 2050. This assumes that fertility starts to recover. If it stays low, the population will dip below 1 billion by 2060…”

    This is said as though it’s a bad thing. The world is damn overpopulated, every country needs a one child policy!

  8. Just curious if there are any views on China’s likely policy responses to the impending demographic change?

    Will China need to consider immigration as a solution (as many before have done) – or will they make do with homegrown fixes such as extending retirement age and/or further urbanisation of rural subsistence farmers?