China’s population time bomb

China has — rightly — been the toast of economic and political commentators alike for the way that it has pulled itself out of poverty to become the world’s second biggest economy and potential megapower in just 45 years since Deng Xiaoping opened the door to the outside world, an unprecedented achievement.

But two official announcements last month show that the progress has come with a large price. Unconventional Economist expressed the problem bluntly on the macrobusiness site, declaring that, “China will grow old before it grows rich.”

Not everyone is so pessimistic. One internationally respected economist of Chinese origin said, “China has a 15-20 year window of opportunity, which is the time between now and when the population peaks. Its leaders have to decide what is most important to them. For me, they should sacrifice everything for the 200 year old dream of joining the rich world.”

China’s ministry of education announced that in 2012 more than 13,600 primary schools closed nationwide. Between 2011 and last year the number of students enrolled in primary and secondary schools fell from nearly 150 million to 145 million. It also added that between 2002 and 2012, the number of pupils in primary schools fell by 20 percent.

This is the impact of the one-child policy — forcing parents to have only a single child — beginning to bite. But this slowing population is only half of the pincer movement squeezing China.

The other pincer is that the population is beginning to age. The People’s Daily warned the day before the announcement of the falling school population that China was facing an impending social security crisis as the number of elderly people is expected to rise from 194 million last year to 300 million by 2025.

The implications are clear. As Richard Koo of Nomura Research Institute noted: “Demographics will cease to be a positive for China’s economic growth and start to have a negative impact.”

The first stage of the demographic challenge is between now and 2015. From 2016, the second stage begins to kick in as a decline begins in China’s working age population, resulting in a rise in the age dependency ratio. The other factor that is going to squeeze China harder is that economists say that it has already passed the “Lewis turning point”: There are no more surplus workers to come in from the countryside, meaning that there is no cheap way to growth. China has to dedicate itself to upgrading its industry to get out of the middle income trap.

The squeeze has come at an awkward or an opportune time, depending on your viewpoint, when China has to take tough decisions about rebalancing its economy away from the investment binge that has left a debt overhang and towards an economy that encourages consumption.

In a careful analysis of the aging population, the U.S. research consultancy Stratfor says that the Chinese leadership is aware of the problem and the difficult implications of it, but that all the potential solutions come with their own problems attached.

Stratfor’s report has a less scary and even anodyne headline — “In China, an unprecedented demographic problem takes shape.”

It notes that the Chinese Communist Party “continues to flirt with relaxing the one-child policy in an effort to boost fertility rates, most recently with a potential pilot program in Shanghai that would allow only-child couples to have another child. On the other hand, the government has proposed raising the national retirement age from 55 to 60 for women and from 60 to 65 for men.”

Raising the retirement age would bring China into line with international norms and would delay the financial and social pressures of ballooning numbers of retired people dependent on government pensions or the care of their children. But Stratfor argues that raising the retirement age will only delay the inevitable, and could meet resistance. “It will meet stiff opposition from an important constituency of professionals, including many civil servants,” the report predicts.

In addition, “the government also risks exaggerating an employment crisis among the rapidly growing population of unemployed college graduates in cities, many of whom are looking to filter into the employment ladder as elderly workers exit the workforce.”

The hopes of reversing the one-child policy may fail, claims Stratfor: “It is no longer clear that the one-child policy has any appreciable impact on population growth in China. China’s low fertility rate (1.4 children per mother, compared with an average of 1.7 in developed countries and 2.0 in the United States) is as much a reflection of urban couples’ struggles to cope with the rapidly rising cost of living and education in many Chinese cities as it is of a Draconian enforcement of policy.”

China’s demographic profile today, as Unconventional Economist points out, bears similarities to that of Japan 20 years ago when Japan hit the economic wall.

The big difference, of course, is that in 1990 Japan was a rich developed country, whereas China today may best be described as an ambitious rising middle-income country. China’s per capita income in purchasing power parity terms is about $6,100, putting it in 86th place in the world league, according to the World Bank, or 90th according to the International Monetary Fund or 92nd according to the Central Intelligence Agency.

Upgrading industry is an urgent task. China is facing competition from Bangladesh and Myanmar where wages are cheaper, and some African countries are also scrambling up the ladder.

What will China do? The respected economist points out: “If a country is run by a dictator, he would typically use foreign enemies to distract the people from domestic affairs. China should do the opposite and declare that this is the first chance in 200 years that China has a chance to achieve developed country status.

“If they use the remaining 15 to 20 years effectively to upgrade the economy, they can join the developed world again. This is what the Chinese nation has been waiting for the last 200 years having been screwed up by the British, the French, the Japanese, and their own massive blunders like the Great Leap Forward, the Cultural Revolution.

“The leaders should give the economy priority and put everything else on the back burner, so conflict with Japan, with Vietnam, the Philippines, those are tiny problems compared to the goal of bringing China to first world status.”

Is Beijing listening? There is of course always the prospect that a big rich country can then build its military firepower.

Kevin Rafferty is a professor at the Institute for Academic Initiatives at Osaka University.

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