China will grow old before it gets rich

By Leith van Onselen

Yesterday, Houses & Holes stated that he was a long-term China bull, largely because of its status as an industrial powerhouse. Today I want to outline the reason why I am a long-term China bear: China’s rapidly ageing population.

As written previously (here, here, and here), China will soon face an ageing problem that threatens to stifle its economy. Essentially, China’s ageing problem stems 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).

However, the demographic blessing provided by the one child policy will soon turn into a curse, with the United Nations forecasting that 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 charts below).

The stiff headwinds facing the Chinese economy were recently acknowledged at the China Update conference, held at the Australian National University on 10 July, which was described in the Australian Financial Review (AFR) as “the biggest gathering of Chinese economic experts outside China”.

According to conference presenter Cai Fang, who is a demographer and National People’s Congress standing committee member, China’s economy is ageing faster than previously thought, meaning that China is likely to grow old before it gets rich (extracts from here and here):

One of China’s top demographers has warned that a slump in the country’s birth rate to Japanese-style lows or worse threatens to slash the supply of new workers and undercut the nation’s rapid economic growth.

Demographer and National People’s Congress standing committee member Cai Fang also predicted that China’s dependency ratio – of children and elderly to the working-age population – would equalise next year in what would be the fastest such change in modern history…

China’s fertility rate (the number of births per woman) is well below the 1.4 level in Japan and closer to 1.2.

“There’s now no doubt China will be old before it is rich,” said Professor Cai, the director of the Institute of Population and Labour Economics and an adviser to the government on population issues. “If our growth rate declines we will not import as much Australian resources but we will need more help with human capital upgrading,” he told The Australian Financial Review

The estimates by Professor Cai and others are early analysis of the 2010 census results and there is now private debate in Chinese academic circles about whether the five-year economic plan accurately reflects the decline in the birth rate and the supply of cheap labour or the increase in the dependency ratio…

Professor Cai said it would have taken just nine years for China to shift from the year in which the supply of cheap agricultural labour for city factories started to decline (known as the Lewis point) in 2004 to the equalisation of its dependency ratio next year.

This would impose major economic modernisation challenges because the same demographic process has taken 30 years in Japan and about 40 years in South Korea…

“This is a real challenge because our potential long-term growth rate will decline,” Professor Cai said.

The likelihood that China would be facing an aging population before it had become a middle-income country has long been known but the faster-than-expected decline in its fer­tility will accentuate this trend…

China will hit the point where there are more dependants than workers next year, which is three to four times faster than during the economic development of Japan and South Korea.

“When Japan faced the end of the demographic dividend (when there are a rising number of workers to dependants) it was already rich and had 30 years to adjust,” Cai says.

The comparisons with Japan’s economy are apt. The Japanese economy, which was toast of the world in the mid-to-late 1980s, hit the wall from 1991 when its joint property and stock market bubbles collapsed and its working population began to shrank.

China, which is facing an equally pervasive property bubble, also happens to have very similar demographics to that which existed in Japan two decades prior. To illustrate, consider the following graphics.

First, the population pyramid of Japan in 1990 versus China in 2010. As you can see, they are very similar:

Second, Japan’s dependency ratio in the 1990s – 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 – is very similar to China’s in 2010 [Note: the UN data from which these charts have been derived has not been updated for the 2010 Chinese Census quoted above, which paints an even more dire picture]:

Third, and related to the above, the profiles of the number of working age people per dependent is very similar in the two countries:

A major difference between the two countries, however, is that Japan was a very wealthy country when its demographic time bomb exploded, with per capita incomes exceeding that of most other Western nations. By contrast, China’s per capita income is currently well below those of the West, which will make the transition to an ageing society all the more harder.

If the saying “demography is destiny” holds true, then China will grow old before it gets rich.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.




Unconventional Economist
Latest posts by Unconventional Economist (see all)


  1. Just Dismal 2

    I thoght “rich” is defined by per capita income, not sizze of population. It’s productivity that matters.

    • thomickersMEMBER

      GDP per capita can also be interpreted by some as “cost to society”. My opinion with china is that other than the 20 biggest cities. The growth has not really given back much to all other parts of china

    • Rich is indeed defined here as per capita income. And China will experience the unprecedented modern phenomenon of dramatic ageing, before it has attained a high level of per capita income. This will make it all the most challenging for China to cope with the phenomenon.

  2. But is Japan such a bad place to live?

    Low unemployment, high on the HDI, longest expected life span in the world.

    When you say things like ‘they had two lost decades’ you make it sound like they’ve been at war or that people are miserable with nothing to do.

    A lack of growth is hardly a failure, especially when a) indefinite growth is impossible
    b) indefinite growth is undesirable (this leads to pollution, congestion, low allocation of natural flow of resources per person)

    Perhaps say something like ‘China will enter a steady state economy much sooner than people will think’.

    Or ‘China may just manage to avoid collapse and civil war, thanks to a rapidly shrinking population. This will increase arable land and water per person over the coming century. It will also help mitigate the exponential decrease in coal production that should hit by 2030.

    If they can couple this large productivity increases and huge amounts of renewable energy, China may become as highly desirable as Japan to live by mid century’.

    • Japan is still a great place to live because its economic structure and position in the world have allowed it to go heavily into debt to support its high living standards. Any government that is borrowing more each year than it is collecting in taxes is not on a sustainable trajectory. I expect Japan can continue for the next 3-5 years before the sheer weight of its demography begins to negate its giant savings pool. From there its either sovereign debt crisis or, more likely, mass monetization.

      • Unlike the rest of us Japan has debt to itself. That’s why the whole debt situation has been able to continue decades longer than modern economists would have thought possible.

        Sure its declining population and ageing situation will have important effects on its saving ratio and CA Balance. Their debt is actually not as bad as our own. We just have more natural resources to sell off.

        Having said that I do agree with your (MJV)conclusions. They also could have a mass repatriation of overseas invested funds including all the A$ they hold. Interesting situation.

    • i have to agree – the losers will be those who live off ponzi growth (ie banks) as well as Australia (which may be the real concern here). Debt growth to some degree can be sustainable WHERE there is a rapid growing population as debt is basically a tax on the future, so if the the future population can grow at a faster rate than the debt then there will be more people in the future to assume the debt (often via an inflated house purchase). The aus housing politco complex is modelled on this premise, although even with our high pop growth debt has far outstripped pop growth.

        • Whilst a country runs a CAS, the debt is sustainable, but I agree at some stage a big write off has to occur.

          Given that the debt is at least all home grown, does give them an advantage.

          • Now that Japan is running a trade deficit its CAS will begin to shrink. The current trade deficit is primarily due to shutting down the country’s nuclear capacity and the resulting energy imports. However the hostility we are witnessing to the government’s recent attempt to restart some reactors suggests this situation is far from transient. More importantly, as the population ages the Japanese will no longer be net savers, as more and more citizens are being forced to draw down savings to fund retirement. As this savings pool diminishes, so will the stock of foreign assets which maintain the CAS. I don’t expect the system to collapse in anything like the timeline envisaged by say, Kyle Bass. But at some point major changes must take place. For Japan’s sake, I hope that occurs sooner rather than later.

          • Thanks for your comments MJV…I must say my earlier comment was made before I’d read your full thread.
            I did read Mauldin’s article on this (Lions in the Grass) or some such in the last few days. He thinks monetization will be followed which will/may lead to widespread currency devaluation war.
            He didn’t consider the repatriation of foreign assets. I guess it will be some combination of everything. Be interested in any further thoughts you had on that.

      • Debt growth is necessary for a growing economy.

        Perhaps what you meant to say is that debt cannot continue to grow as a percentage of GDP, as this would mean that the debt is accelerating and a crisis is inevitable (as is currently the case with Japan).

        In this way I don’t think it is a question so much of how your population increases/decreases, rather of how your GDP changes with respect to your debt levels.

        Of course the panic over aging populations seems a little over done when the bulk of work done for people in developed countries e.g. to feed, transport, and house them, is done by machines drawing down finite sources of energy. And I mean work in the physics sense, not in the I-sit-at-a-computer-all-day-surfing-the-net work.

        Of bigger concern for big energy importers like Japan and Europe is where they will get the energy to support their economies in the next 50 years. Note that if they can shrink their populations by 1%/yr then the scale of their resource problem may also be halved.

        I do believe the Africans have the oppositie approach but this doesn’t seem to have worked out too well for them…

    • Japan is one of the best place to live. Actually one can earn much, but also spends much. They have the best services and quality of everything. Once one has lived in Japan, s/he will be for ever spoiled and wouldn’t like anything else anywhere else (like services or goods). The only problem is making friends and you never know whether you do right or wrong even when you are very polite in our classical sense. It is very long and very hard way to do a Japanese friend. They don’t trust the gaijin. Their success is due to the homogeneity of their society and they know it.

  3. This will be great for the youth of China as it means they will have decreasing competition for jobs and wages will rise.

    In Australia on the other hand with its mass immigration policies the young, and in particular the less educated, face a lot of competition for jobs from immigrants and as manufacturing dies I would expect to see a decrease in real inflation adjusted wages.

  4. One child policy is also known as “four grandparent policy”. In two decades almost all Chinese in their 20s will have four grandparents to take care of (directly or through taxation).

    • Yes…and lots of ‘Little Emperors’ who are not going to work and get their hands dirty as their parents had to do!

  5. UE, great article.
    Chinese law requires adults to support their parents, yet many are not.
    China ageing is of course not in isolation, however the very low real wealth of the people is a grave concern.
    I do note that their ghost cities have been planned for this ‘aged support’ period to come for China.

  6. i believe this issue is over emphasised. If as a nation , the chinese are able to control world trade via running huge surplus, exploit impoverished nations that have borrowed too much, they can continue to do well, look at the swiss as an example.
    They may end up owning huge swathes of Africa and Australia and suck the wealth back to China.

    • Africa is the only region with a pyramid population profile. China is investing heavily in Africa. All other regions are growing older together.

      Japan has enough net savings for every person to live off the rest of the world for 8 months. Germany has set itself up for the young people in the EU periphery to move to Germany to support Germans in their old age. However Germany’s demographics are way behind Japan and they have not yet reached peak debt let alone peak savings. Both China and Germany are still 5 years or so away from peak debt then another 15 years for peak savings.

      Problem with China is that there are not enough young people in the world to suck up their savings and become indebted to support Chinese retirement at a level similar to what Germany and Japan can expect.

  7. Fantastic piece. It is worth noting that while the ‘one child policy’ would have had a significant impact during the early stages of China’s development, it is no longer the main factor in China’s low levels of fertility. The collapse in fertility we are seeing in China is common to all East Asian nations as they’ve undergone rapid development. And I agree; owing to its level of development, China will have substantially more difficulty in dealing with this transition than its wealthier neighbours.

  8. A major difference between the two countries, however, is that Japan was a very wealthy country when its demographic time bomb exploded, with per capita incomes exceeding that of most other Western nations. By contrast, China’s per capita income is currently well below those of the West, which will make the transition to an ageing society all the more harder.

    This contrast is the one mentioned by medias recently but not necessarily true. The notion that average Chinese population will grow old before society become richer like Japan’s experience is not necessarily bad for China or maybe for Chinese government. This may be a reason for more sustainable Chinese economy in the future compared to Japan or European states.

    The Chinese population who are not much exposed to high-income / high wealth / high welfare and tax customs in their life would have less “entitlement expectation” especially compared to Japan’s population who adopted heavy-welfare government policy since the 1960s. That’s why Japan now has very high and unsustainable government debt just like the troubled European states with their high welfare-entitlement problem amongst their aging population.

    • I think you nailed it there. The only problem with a decreasing population and hence a high rate of elderly dependants is that in countries like Australia they seem to think that they should be supported in a high standard of living for 25 years after they retire.

  9. So why does Maceobusiness insist that the next several decades will be exactly the same as the past re imports and the price there-of?

  10. What’s the term for someone who is neither a bull nor bear?
    Because that’s what I am with regard to China.
    At least for the next 10 years, I think it will continue to achieve good growth, if not the 10% of recent years, perhaps 5-7% per annum
    Now that is enough slowdown to have implications for China-dependent countries like Aus, but not enough to derail China’s growing influence.

  11. The other issue with China’s demography is the fact that their is a serious imbalance between male and female which will compound the problem, too many males and not enough females