China’s demographic crunch

by Michael Richardson

Just four years from now, China will pass a milestone. Its huge workforce will peak and start shrinking. This will make it more difficult for the world’s second largest economy to continue the turbo-charged growth that has played a key role in the rise not just of China, but also its Asia-Pacific trade and investment partners like Japan. They depend heavily on exports to the Chinese market.

Part of China’s success since economic reforms and market-opening were started in the late 1970s has rested on its army of low-cost workers in industry and export manufacturing. As labor shortages have developed in parts of China in the past few years, wages and other costs have risen, making exports less competitive and investment less attractive.

But the decline in the workforce is part of a bigger problem for China, the world’s top exporter. Its population is aging, so sharply that the state-run China Daily recently called the trend a “ticking time bomb” for the government as it struggled pay the rising pension and health care costs of an increasingly elderly cohort.

Dai Xianglong, the head of China’s social security fund, warned last month that there was a “huge” shortfall in the capital needed for future pension payments. To forestall the crisis, officials have suggested raising the retirement age from 60 and allowing the fund to make higher-yield, but riskier, investments.

At the end of last year, 123 million Chinese, about 9 percent of the 1.35 billion population, were aged 65 or over. By 2030, the number of seniors is projected to be close to 240 million, or 17 percent of the population. Chinese demographers have warned that there will be less than 3 working-age people to support each senior citizen in 2050, down from 10 in 2000.

China is not alone in this demographic crunch. The outlook casts a shadow over future growth of the global economy, many big parts of which are now stagnant or slowing. The world’s economically active manpower is set to grow between now and 2030 at just half the pace of 1990-2010, when the two biggest centres of workforce growth were in China and India, the most rapidly expanding major emerging economies at the time.

By contrast, in the next 20 years, as Japan, Europe, Russia and China experience a sharp shrinkage in their working-age manpower, the slower increase in workforce growth will be dominated by sub-Saharan Africa, Pakistan and Bangladesh, which have poor records of economic performance.

The aging countries face a future of smaller work forces, lower savings rates and higher government debt. They may well lose dynamism and international clout as well, as growth sags and military spending falls.

Will this be China’s future too? By far the most massive decline in young manpower, aged 15 to 29, is set to take place in China. The U.S. Census Bureau forecasts that in the next two decades this key working age group, which tends to be better educated and healthier than older employees, will fall by 100 million, or over 30 percent.

The bureau predicts that China’s population will peak in 2026, then age rapidly. Among major economies, only Japan has aged faster. However, Japan got rich before it grew old. This is something that China, with a per capita income of just $3,000, has yet to achieve. It may never be able to so if Chinese keep having few children and living longer.

Before the government enacted the one-child per couple policy in the late 1970s, China’s fertility rate (births per woman per lifetime) was about 2.7. Today it is around 1.5, some 30 percent below the level that demographers say is needed for population stability.

Despite the recent deceleration of China’s economic expansion, Beijing still forecasts a continued average annual growth rate of approximately 7 percent between now and 2030. This rosy prognosis has been accepted by many analysts and officials in Asia and the international financial community, even though no other big economy in world history has ever grown so fast for so long.

Nicholas Eberstadt, who holds the Henry Wendt Chair in Political Economy at the American Enterprise Institute in Washington, doubts that China can sustain such a high-octane performance in the face of the demographic tempests it will have to weather in the years immediately ahead.

Still, China has numerous ways to raise productivity. These include migration of rural workers to more skilled urban jobs, wider application of under-used technical know-how, improved banking and loan systems, and institutional and policy reforms to enhance economic efficiency.

But Eberstadt says that given the confluence of demographic challenges faced by China, its growth over the next 20 years “could be slower than is generally expected today, possibly dramatically slower.”

Meanwhile, the United States, an immigrant society, appears to face a somewhat brighter demographic future than its NATO allies in Europe and Japan, although it is saddled with heavy debt and welfare payments as well. Virtually every age group within the U.S., from babies to centenarians, is set to increase, as the population grows by 20 percent, or over 60 million people, to reach 373 million by 2030.

Michael Richardson is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore.