China shares Japan’s ageing population risks

By Leith van Onselen

A couple of weeks ago I published an article, China will grow old before it gets rich, which questioned whether China’s rapid economic development could continue in the face of a rapidly ageing population as the “One Child Policy” comes back to bite.

This article contained numerous comparisons with Japan’s economy, which was the toast of the world in the mid-to-late 1980s, but 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, happens to have very similar demographics to that which existed in Japan two decades prior, as shown by the following graphics.

First, the population pyramids of Japan in 1990 versus China in 2010 are remarkably 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:

As are the the profiles of the number of working age people per dependent:

Yesterday, via ZarathustraMichael McDonough of Bloomberg Brief looked at the effects of ageing on nominal GDP growth in various Japanese prefectures. The results speak for themselves:

Only one prefecture (Okinawa) is showing positive growth. As noted last time, a major difference between China and Japan 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 diffcult.

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. Rumplestatskin

    A very good topic to be analysing. And we can probably extrapolate similar trends across much of world. I do’t really see this as a bad thing. And it’s not like the Chinese government can’t see this coming.

    You just need to make sure that you are promoting a smooth adjustment to this new demographic situation. I expect the Chinese model of massive capital investment led growth will stall as this ratios begin to bite. But what replaces it is equally important.

    On the working age v dependent graph, does that include children and elderly? Because we know that there is a fair bit of offsetting from fewer kids in such a demographic transition.

    • MontagueCapulet

      “we can probably extrapolate similar trends across much of world…”

      Absolutely. USA,Western Europe,Japan and China have all peaked demographically. The countries whose peak is in the future don’t have the economic muscle to make a difference. I am EXTREMELY sceptical about the ability of poor African and South America resource producers to become an engine of growth – their recent success is based on selling food and minerals to China.

      And any country that could not get to middle income level during the favourable conditions of the last 20 years is unlikely to make much progress in the next 20.

      A simultaneous demographic slump in every major economy together with a global debt overhang suggests that 20 years of stagnation is the likely scenario.

      But there’s going to need to be a huge amount of global QE to achieve stagnation. In real terms it will be a depression, due to the overcapacity in manufacturing, property and infrastructure.

      • USA,Western Europe,Japan and China have all peaked demographically.

        Wrong in the case of USA. High levels of immigration continue to keep the age profile more favourable. With Western Europe, it depends a lot on whether current high levels of immigration from North Africa, Eastern Europe and West Asia continue long term.

  2. One big difference: Japan’s industrial base was, and is, highly automated, whereas China’s is still based on a Dickensian model of cheap labour and hand assembly. Thus Japan has a higher potential labour productivity and is in a much better position to cope with a declining working population.

    • And during Japan’s decades long debt deflation, the rest of Asia was developing, the West was going through the tech boom.

      Perhaps parts of Africa and Middle East can fill that very large output gap if China goes through a similar deflation?

      But then that does go to your note and Leith’s analysis – Japan was wealthy (not just because of debt) before their deflation, China is not – and neither is Australa.

      We have housing and resource wealth, propped up by debt, but not economic/prosperity wealth to take advantage of these long term trends.

      • Demographics in Australia is like some kind of taboo subject.

        I have to admit to not having any statistics to back up my rather anecdotal observations, however, our biggest demographic is approaching retirement age, reigning in their spending, downsizing their houses and running down their savings to fund their lifestyles.

        The dopey gen X-ers like me, have debt and property and negative net worth for the most part.

        The gen Y-ers have no assets and a high rate of unemployment.

        So who pays the baby boomers more for their assets than they themselves paid for them ? Fundamentals schmundamentals….. there has to be a buyer willing to pay more and I don’t really see who that is these days.

        • Correct.
          1. The myth that people started to save more only after the GFC is false. savings were going up since 2006.
          2. The myth that they are more Gen X and Y than boomers is correct, only if you add the two generations together.
          3. 40 years up and 30 years down.

        • +1 While politicians and media have linked negative connotations with “population growth”, “immigration”, “international students”, “boat people” etc., no one has looked in depth at issues concerning our ageing demographic situation.

          Why? Probably because too many do not want to be reminded of their own mortality and does not fit the contemporary negative political narrative about all things immigration related……

          Heaven forbid anyone encouraging immigration, international education, temporary workers etc.

      • MontagueCapulet

        “Perhaps parts of Africa and Middle East can fill that very large output gap if China goes through a similar deflation?”

        A bunch of resource-dependent failed states will become an engine of global growth? Surely you jest.

        If they had the cultural environment and legal systems required for development, we would have seen some progress already.

        Morocco and Turkey have some potential.That’s about it.

  3. I think this will be a good thing for China and really the only way they will be able to increase their quality of life over the long term. With a massive population there is just no way the country has enough resources to support a high standard of living for all of them.

    While they will end up with a huge imbalance of geriatrics for a while, in a few decades as the current 50 year and above generation retire there will be an acute labour shortage meaning that the young workers of today should do alright.

    The older generation might suffer a bit as the country will be able to afford minimal support for them, but fortunately unlike our baby boomers their lifestyle expectations in retirement are not ridiculous.

    Being a younger person I would much rather have the demographics of China or Japan the the crazed population ponzi of Aus, where the youth have to compete for housing and jobs with an ever growing population of skilled immigrants (including myself) which are brought in by the government at the request of business interests.

    Lastly in this case I don’t think an ageing population will effect Chinas GDP in the same way as they can still automate manufacture process which are largely done by hand at present to mitigate any decrease in labour for a long time yet, using technologies that are currently in use in many parts of the world already.

    • +1 same with my argument in the past. The key is managing those grey BB generation’s expectation. I agree with you that China or Japan may have better situation compared to US or Australia with many grey population with much entitlement expectation in the future.

      You’re right also on the effect of population / immigration ponzi scheme. It is basically a giant wealth transfer from the young generation to the BBs.

    • I agree. I’d rather the “problem” of an aging population than a rapidly growing one. I cannot imagine China would be better off with 2 billion – slightly younger – people than it’s current 1.3.

      It might actually fix the problem most western nations seem to have of chronically high under and unemployment. Look at Europe, “bad” demographics, yet some countries have up to 50% youth unemployment.

  4. The biggest issue I think is the gender imbalance. Over 100 million males than females and all under the age of 34.

    This will have a whammy effect further on down the track besides the aging.

  5. The one factor I don’t see mentioned in an analysis of this issue is whether China could soften the One Child Policy to a Two Child Policy, easing some of this demographic decline? I would imagine it would be a relief valve for some of the grievances in the regional areas too.

    (though for that matter, would the one child generation necessarily jump at the prospect of having two of their own? Not sure)

    • In rural areas, many of them are already doing that (having two kids).
      For families living in the big cities, the gender of their child is becoming less of an issue nowadays. Some even prefer having girls. And most can’t afford to have more than one kid.

      • I knew that in rural areas the policy was more flexible, but as I understand it there’s still a limit – something which was strongly tested in the aftermath of the Sichuan earthquake in 2008 (?), when a number of schools were destroyed and as a result many children killed. I thought many weren’t ‘allowed’ to have children afterwards?

        I would imagine that with the proportions of boys to girls, parents of girls are in a good bargaining position 😛

        • They are not ‘allowed’ unless they pay a ‘fee’.
          A couple month ago, there was a woman had her unborn forcefully aborted, not because of the policy, but she refused to pay the demanded amount.

        • And prefer having girls is mostly to do with costs.
          The groom now has to come up with the big items before entering a marriage, i.e. RE, car, diamond, etc. In the old days, it used to be the other way around.
          Not sure how it became like that. Maybe something to do the screwed proportions.

        • There is quite a bit of ‘flexibility’ when it comes to the one-child policy. A couple of rumours i have heard include:

          1. In big cities, if a married couple themselves have no siblings, then they are allowed to have two children.

          2. Wealthy families can just pay the penalty fee to have a second child, which is a proportion of income, i believe.

          3. In rural farming areas, and remember most of China’s population resides in rural areas, if a married couple’s first child is a daughter, then they may have a second. If the second is female, then they may try for a third. If the third is a daughter, then they aren’t allowed to try again. The idea being that males are important farm labour so they can try a couple of times.

          I have also heard that there is a significant amount of what are referred to as ‘black-heads’ – children who are born to parents not permitted to have any more, and thus don’t get registered with the state. They don’t get education, no id, and have a fairly terrible existence as they can’t function in society in a normal way.

          Not sure if any other readers have heard similar things?

          • Different cities/provinces have their own rules.
            Yes, it is somewhat flexible.

            1. Beijing & Shanghai have had a rule like that for years now. But I don’t think it applies to all big cities.

            2. Yes, most penalties are financial, e.g. no more free 9-year education, delayed career progression, etc. In severe cases, parents may lose their jobs. So it matters much more for people working for the govt or in state owned companies.

            3. Again, depends on the area, and how greedy/corrupted the local officials are.

            “black-heads” are people without “household registration”. The registration is used to tightly control population movement. That’s a huge topic on its own. Yes, those people may face many disadvantages. But I think many manage to survive “fine” by working for private companies. May get paid less tho.

            P.S. If one’s “well connected”, none of the rules applies.

    • The one-child policy only covers around 40% of the population.

      Huge swathes of China are not, and never were, subject to it.

    • I think what we will find that the ‘demographic paradox’ will also apply to China as its economic conditions improve. The wealthier a nation become, the faster fertility falls. I would not be surprised if fertility was to remain below replacement levels for China, even if and when it does relax the one child rule.

  6. China is differnet with regard its ageing a demographics.

    China does not have the pension system we have or the free health care to the same level, so their issues are far worse than ours or Japan. Generational wars are a big issue for China as the unhappy middle class rising youth their may feel resentment towards the west.

    George Magnus, UBS’s global guru, writes in his book Uprising that China faces a “triple whammy of ageing”. The number of children under 14 will fall by 53 million by 2050; the workforce will contract by 100 million; and the population aged over 60 will rise by 234 million, from 12 per cent to 31 per cent of the total.

    From 2006, still and interesting read…

  7. Anthony Rush also did a good piece for Treasury..

    2011…”China is one of the top fastest growing economies in the world, and some economists believe China will overtake the US with a larger GDP in a matter of a few years. Last year, the number of millionaires in China grew 12 percent, and while the US still has the most millionaires – they’re 15 years younger in China. According to some reports, sources suggest China is set to have almost doubled the figures of their billionaire headcount.

    The Hurun Research Institute found 55 percent of China’s millionaires have acquired their wealth through private businesses, 20% percent are property developers and 15 percent are stock market speculators. The remaining 10 percent are company executives.

    But while China’s rich lead the emerging superpower’s economy, vast income disparities still exist.

    In 2009, the number of households with more than US$1 million reached 670,000; ranking China the third in the world for millionaires behind the US and Japan. However, the wealthy in China only account for 0.2 percent of households. A proportion that is far lower than other countries.”

    The Chinese are certainly not in the dark..