China’s Shrinking Economic Base

CommentaryChina’s latest statistical release seems to have caused quite a stir. Beijing has announced that the nation’s population has declined outright—by some 850,000—since the last census. More impressive still, United Nations demographers see continued shrinking from a population of 1.4 billion presently to 1.3 billion in 2050, to 800 million or so by the end of the century. Surely, media outlets mused, this remarkable trend would have a negative impact on the country’s economic prospects. This musing is correct. The nation’s demographic reality will have ill effects on China’s economy. But the economic significance lies less in overall population figures than in the relative size of China’s working population. It is declining faster than the overall population, which will severely constrain the nation’s growth prospects—not immediately but with growing intensity over the coming years. These demographic trends will compound the ill economic effects by raising debt levels in this already debt-heavy economy. Moreover, there is little Beijing can do to mitigate these unwelcome implications. The crucial economic consideration is how many working-age people China has available to support its population of dependent retirees. Because Beijing imposed a one-child policy on Chinese families from 1980 to 2015, the nation now faces a relative paucity of workers to replace the huge generation that is now retiring. The numbers of those of working age—by convention, between 15 and 64—have hardly grown at all since 2010. But the older population of retirement-age Chinese has grown a whopping 53 percent, increasing from 9 percent of the total population in 2010 to 13 percent at last measure. Consequently, today, barely 3.5 people of working age are available to support each retiree, down from about 6.5 in 2000 to 5.5 in 2010. And that figure is expected to fall below 2.3 workers per retiree by 2030 and even lower in the years following. A group of elderly retirees stages a sit-down protest outside the Chinese Ministry of Justice over their unpaid pensions in Beijing on Nov. 8, 2011. (Goh Chai Hin/AFP via Getty Images) This circumstance has profound economic implications. No three-some workers anywhere are productive enough on average to support themselves, their personal dependents, and a third of everything each retiree needs. The strain will be that much greater than the raw numbers imply because the large aging population will necessarily siphon off workers from daily production to the medical and other care services needed by the elderly. The strain will leave little surplus production for the investments required for economic growth, especially the grand projects for which China has become famous and that have contributed to the country’s former and impressive pace of growth. If these immediate economic considerations were not severe enough, China’s demographics would have significant and adverse financial implications. The pension needs of these retirees will force considerable borrowing requirements on local governments as well as Beijing. China already carries a bigger debt burden than most countries, including even the United States. At last measure, all public and private debt amounted to the equivalent of about $52 trillion, verging on almost three times the size of the economy. To be sure, Washington carries a bigger debt burden than Beijing, but that is because Beijing offloads borrowing needs to support infrastructure spending, for example, onto local governments. Pension demands will increase this burden still further and unavoidably crowd out the growth-fostering projects that, in the past, have done so much for China’s development. And there is little Beijing can do to offset these ill effects. A few years ago, the authorities finally awakened to the potential economic damage of the one-child policy. They rescinded the law and allowed larger families. But even if Chinese people had immediately taken advantage of that situation, it would take 15–20 years for the change to have an effect on the relative size of the country’s working-age population. As it is, the nation’s fertility rate has not risen in response to the new law. Nor is China likely to see a wave of immigration to enlarge the ranks of workers. The only other avenue open to offer relief is in the growth of worker productivity. To this end, Beijing has emphasized developing and adopting artificial intelligence (AI) and robotics. Indeed, China has become a world leader in these areas. In time, these trends will undoubtedly substitute algorithms, computers, and machines for labor and make the country’s relatively limited working population more productive than it is today. AI and robotics can also help by limiting the need for physical labor, enabling the Chinese to work at older ages than in the past. But these things can only go so far. However much of these efforts can mitigate the strain imposed by demographic realities, they can

China’s Shrinking Economic Base

Commentary

China’s latest statistical release seems to have caused quite a stir. Beijing has announced that the nation’s population has declined outright—by some 850,000—since the last census.

More impressive still, United Nations demographers see continued shrinking from a population of 1.4 billion presently to 1.3 billion in 2050, to 800 million or so by the end of the century. Surely, media outlets mused, this remarkable trend would have a negative impact on the country’s economic prospects.

This musing is correct. The nation’s demographic reality will have ill effects on China’s economy. But the economic significance lies less in overall population figures than in the relative size of China’s working population. It is declining faster than the overall population, which will severely constrain the nation’s growth prospects—not immediately but with growing intensity over the coming years. These demographic trends will compound the ill economic effects by raising debt levels in this already debt-heavy economy. Moreover, there is little Beijing can do to mitigate these unwelcome implications.

The crucial economic consideration is how many working-age people China has available to support its population of dependent retirees. Because Beijing imposed a one-child policy on Chinese families from 1980 to 2015, the nation now faces a relative paucity of workers to replace the huge generation that is now retiring. The numbers of those of working age—by convention, between 15 and 64—have hardly grown at all since 2010.

But the older population of retirement-age Chinese has grown a whopping 53 percent, increasing from 9 percent of the total population in 2010 to 13 percent at last measure. Consequently, today, barely 3.5 people of working age are available to support each retiree, down from about 6.5 in 2000 to 5.5 in 2010. And that figure is expected to fall below 2.3 workers per retiree by 2030 and even lower in the years following.

Epoch Times Photo
A group of elderly retirees stages a sit-down protest outside the Chinese Ministry of Justice over their unpaid pensions in Beijing on Nov. 8, 2011. (Goh Chai Hin/AFP via Getty Images)

This circumstance has profound economic implications. No three-some workers anywhere are productive enough on average to support themselves, their personal dependents, and a third of everything each retiree needs. The strain will be that much greater than the raw numbers imply because the large aging population will necessarily siphon off workers from daily production to the medical and other care services needed by the elderly. The strain will leave little surplus production for the investments required for economic growth, especially the grand projects for which China has become famous and that have contributed to the country’s former and impressive pace of growth.

If these immediate economic considerations were not severe enough, China’s demographics would have significant and adverse financial implications. The pension needs of these retirees will force considerable borrowing requirements on local governments as well as Beijing. China already carries a bigger debt burden than most countries, including even the United States. At last measure, all public and private debt amounted to the equivalent of about $52 trillion, verging on almost three times the size of the economy.

To be sure, Washington carries a bigger debt burden than Beijing, but that is because Beijing offloads borrowing needs to support infrastructure spending, for example, onto local governments. Pension demands will increase this burden still further and unavoidably crowd out the growth-fostering projects that, in the past, have done so much for China’s development.

And there is little Beijing can do to offset these ill effects. A few years ago, the authorities finally awakened to the potential economic damage of the one-child policy. They rescinded the law and allowed larger families. But even if Chinese people had immediately taken advantage of that situation, it would take 15–20 years for the change to have an effect on the relative size of the country’s working-age population. As it is, the nation’s fertility rate has not risen in response to the new law. Nor is China likely to see a wave of immigration to enlarge the ranks of workers.

The only other avenue open to offer relief is in the growth of worker productivity. To this end, Beijing has emphasized developing and adopting artificial intelligence (AI) and robotics. Indeed, China has become a world leader in these areas. In time, these trends will undoubtedly substitute algorithms, computers, and machines for labor and make the country’s relatively limited working population more productive than it is today. AI and robotics can also help by limiting the need for physical labor, enabling the Chinese to work at older ages than in the past. But these things can only go so far. However much of these efforts can mitigate the strain imposed by demographic realities, they cannot correct for them entirely, leaving China facing slower growth with less room for grand investment projects than has been the case until now.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Milton Ezrati is a contributing editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, a New York-based communications firm. Before joining Vested, he served as chief market strategist and economist for Lord, Abbett & Co. He also writes frequently for City Journal and blogs regularly for Forbes. His latest book is "Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live."