China Will Get Old Before It Gets Rich

By Leith van Onselen, Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. You can follow him on Twitter at @leithvo. Cross posted from MacroBusiness

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.

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  1. ozajh

    Something I noticed a while back about national fertility rates was that Macau, Hong Kong and Singapore fill 3 of the BOTTOM 5 places, all significantly lower than the PRC proper.

    All 3, of course;
    1. Are overwhelmingly Chinese demographically.
    2. Were long touted, especially Hong Kong and Singapore, as demonstrating the superiority of capitalism over the evil communism.
    3. Were NOT subject to the even-more-evil (in some eyes) one child policy.

    I acknowledge that the one-child policy had its problems, especially where it turned into a de-facto one-SON policy (and IMHO the macro impacts of THAT are going to be felt for some time to come). However, given the impacts in various areas we have seen from Chinese industrialisation, would we REALLY have preferred that those 400 million births had ocurred?

  2. Hangell

    Oh please. Not everything is ideological. Putin’s neo-USSR isn’t doing so hot in the demographics department particularly if you are Russian Christian.

    Singapore’s rather authoritarian Lee Kuan Yew was onto this problem long before it became fashionable but there seems to be no answer short of welfare state underclass breeding programs. The plain fact is modern economies are out of sync with human females biological clocks. In order for a female to have an economic future she must spend a good portion of her prime procreative years in schooling and work. The more successful she is in either endeavor the less her chances are of producing more than one or two children. Only if she fails academically and socially does her opportunity to breed become economically useful… to her.

    In order to counteract this reality we will need to either change our reliance on female participation in the labor force which is not really possible given our debt obligations or change the female biological clock which is possible through egg implantation in older females who have the income and social position to raise children successfully.

    1. Yves Smith Post author

      No, you’ve got that a bit wrong. Advanced economies where the husbands take more responsibility for household duties have higher birth rates. That IMHO is one of the big reasons for the plunge in Japanese birth rates. The officialdom is in an uproar about “parasite singles” (young women who get jobs and continue to live with their parents well into their thirties) but seeing how sucky it is being a housewife in Japan, it’s easy to see why anyone who has options would opt out.

        1. Yves Smith Post author

          Hah, I can’t speak from personal experience, but Japanese housewives have a particularly unattractive deal. Men come home late drunk, expect women to wait on them the little they are home.

          I dimly recall from the study I read there were some European countries where the men were much better re carrying the load in terms of house duties and the birth rates were much less bad than in the rest of Europe.

          1. jake chase

            You might be surprised at the number of women who still accept housework as a small price to pay for being supported in luxury. Conceptually, I always liked that deal myself, but I never found it.

        2. Foppe

          Read up on Japan a bit and you’ll see that males are quite ‘traditional’ compared to those in other cultures..

          1. Heretic

            Yes, I have heard that Japanese men are quite traditional, and they enjoy a lot of drinking. But I have also heard that 33% of the working population (or is it 33% of the 18-30 crowd) are only contract workers (so low pay, low benefits), a manic work culture similar to investment banking (long hours, + mandatory hard partying) and living expenses are crazy expensive. These factors would be very discouraging toward ‘household formation’.

            I believe Japan has suffered under globalization. Prior to the mid 80’s, most manufacturing was truly ‘made in Japan’, and most people had decent income and lifelong employment. But the combined pressure of USD re-evaluation, and the quest for profit, pushed many Japanese companies to off-shore much manufacturing, destroying many small companies and manufacturing white and blue collar jobs in the process. Hence t high temporary unemployment and the sense of fear and uncertainty among population, hence th low household formation.

      1. SocraticGadfly

        Real question:

        Where will our U.S. “free trade” overlords get their cheap labor in the future?

        Answer? That “giant sucking sound” is the vortex going from Shanghai to Mumbai, isn’t it? Vietnam doesn’t have enough total population. Mexico’s a lot closer, but actually it’s birth rate is the same as the US. And, Brazil’s doing well enough without that.

    2. Externality

      Russian birth rates have actually converged with those in the US and may surpass them. From Forbes magazine:

      Indeed, if trends hold, Russia’s 2012 birth rate will actually exceed the United States’, a truly remarkable and noteworthy turnaround considering where things stood as recently as 2000. At an absolute minimum the fact that Russian and American birthrates are now roughly equal ought to seriously complicate the media narrative of a dying Russia and an all-conquering United States.

  3. jake chase

    There is something absurd about the ideas of growth and wealth implicit in this analysis. The implication is that a country gets “wealthy” by having more “workers” churning out more drek on a world “market” already saturated with largely useless and redundant “commodities” which those “producing” them are running out of ways to “market” to a population of “consumers” who are just about tapped out. For about twenty years America was supposed to be getting “wealthy” by having ten percent of its population developing and selling overpriced real estate to a “working” population largely engaged in landscaping, cleaning pools, dressing hair, selling hot dogs at sporting events, retailing politically correct nonsense on college and high school campuses, and spouting hot air on television. I for one am looking forward to a dearth of Chinese workers, since I already have more than enough shoes which do not fit and tools which are useless for their intended purpose (or at least for my intended purpose).

    1. They didn't leave me a choice

      Since it’s quite obvious that:
      wealth != population AND
      wealth != consumer trash AND
      wealth != asset prices AND
      wealth != money AND
      wealth != industry

      But what /is/ wealth? Energy available per population unit?

    2. wunsacon

      Agree wrt the “demographic ponzi scheme” of encouraging population growth to add to total GDP. I’d like to see people focus more on “per capita” figures.

      Plus, with increasing automation and AI, that disconnect we see between “GDP” and worker pay will continue to grow. There will come a time when GDP will grow with effectively zero human input. Foxconn will eventually become a lights-out operation.

  4. J Sterling

    Population “pyramids” should not be pyramids at all. There are only two ways to make an age profile pyramidal. The first is to steadily kill people as they get older, by poverty or overwork. The second is to have an increasing number of children, so that, although the old are not dying, they are being outnumbered by the young at any time.

    The first is a historical horror we are trying to get away from: an aging population is one that’s not dying, and I have to point out to “demographic time bomb” alarmists that not dying is a good thing.

    The second is literally a pyramid scheme. The music of population growth has to stop some time, and the longer it goes on, the fewer chairs there will be when it stops.

    Population pyramids should be evolving into population bullets, and eventually population pencils, for the population’s sake. Only a labor-exploiting rich minority really want a pyramid, because they have no use for the old.

    1. Ruben

      “Only a labor-exploiting rich minority really want a pyramid, because they have no use for the old.”

      Big pharma may disagree.

    2. James

      Population pyramids are a remnant of the agricultural age, which is why they’ll persist for while yet in China. But of course, our future is their’s (seemingly), so that will go by the wayside soon enough. But the old? Yep, the “great elimination” age may well be dawning, at least for those of us of modest means. The current and ongoing US healthcare fiasco definitely indicates that the political will is already in place. Eliminate SS & MC, then rape the pension funds by eliminating financial/casino regulation, then force the population into the waiting arms of the private insurance market (cattle drive, anyone?), and the effects will be the same, whether or not anyone ever mouths the words “final solution.” Fascist capitalism: the BIGGER, BETTER, final solution. Save only the young and efficient ma’am, only the young and efficient.

  5. cbu

    China’s demographic problem is greatly exaggerated. First of all, the one-child policy will be abolished sooner rather than later, maybe within 5 years. When it happens, Chinese economy will get a big boost. The fertility rate in rural hinderlands are still high, probably more than enough to compensate the decreased fertility in large cities in the coastal areas. Second, when was the last time labor shortage was a real problem? One of the main difficulties advanced economies will face is increased automation and decreased demand for manpower. So will future China. I think it’s better off for China to have less kids but well nurished and educated kids. India, with half of her Children malnutrished, will have much bigger problems than China. Finally, there is more than enough time to set up social safety net even for the worst case senoria.

    Even China’s excessive males is not really a problem unless China has one of the lowest sociaeconomic status in the world. Foreigh brides will always be available.

  6. Tiresias

    Three observations I would make from no expertise in the area whatever:

    1. Would the world be better off with the 400 million more people we are apparently missing?

    2. Here in the West “the Authorities” are already trying to talk the retirement age up, on the ostensible grounds that people are living longer and more healthily, and can therefore work longer – while making noises that pensions for everyone at the current age are unaffordable.

    3. Here in the West permanent unemployment is growing as processes are mechanised and workers made more efficient. China will adapt to the same more quickly allowing a smaller working population to achieve what us done today.

    This entire article might have been appropriate to the industrial world of 1850-1980 but society is now looking past the life-model of child-student-worker-retired.

    1. Carol Sterritt

      And of course, the “Authorities” tend to have rather simple, plush jobs, that often are actually handled by their staff, So they can easily point to their own lives and say, “I am seventy one years old. See how hard I work. Why shouldn’t others my age do this also?”

      In typing a comment like this out, Ben Stein always comes to mind. he has had a pretty nice life – appearing in commercials, and Ferris Buehler’s Day Off.

      And writing for the NYT’s as well. Then he also gets to be a panelist on conservative talking head shows. he then makes “astute” judgements such as the following words from his mouth: “retirement is a fairly new phenomena and since for the millenia prior to our modern age, most people never retired, I believe most people will learn to live without retiring AT ALL.”

  7. Juergen Botz

    There is another big problem for China which together with the againg population will hit the Chinese economy as a double whammy in the near future… the second rise of the robots.

    Robots, and other advanced automated manufacturing technologies are getting cheaper and better very fast now. So much so that some manufacturing is already returning to the US! See for example:

    So just as the older workers are going out the pool of high paying jobs for incoming young works is going to start shrinking.

    1. They didn't leave me a choice

      >Autodesk CEO Carl Bass says that just as we have created new, higher-paying jobs in every other industrial transition, we will create a new set of industries and professions in this one.

      New jobs? Maybe. What about the numbers? Or will it all just go into the “reserve army of the unemployed” to scare the existing workers into obedience by making everybody maximally replaceable? Fuck these supply siders arses with a rusty rake. Without lube. They don’t deserve any.

  8. David Petraitis

    And I wouldn’t forget the chance for a large die-off event. A recurrence of the flu at a virulence and mortality rate similar to 1915 would literally decimate aging populations. Your humble blogger included.


  9. From Singapore

    I am a male living in Singapore and I am not married. However based on conversations with friends etc, there are a number of factors contributing to the low birth rate:
    1. Higher female education. Lee Kuan Yew was on record saying that he regretted allowing this to happen (you can google this).
    2. Cost. This country is insanely expensive for people with children. Tuition is a must because everyone here is so competitive when it comes to education and the best tutors pretty much charge an arm and a leg. In fact the phenomenon of millionaire tutors is common here (and in Hong Kong and in South Korea, you get the gist). Tuition is of course on top of health check up, etc, etc. The government is doing its part by giving tax rebates to working mothers, etc, but given the long working hours, etc ….
    3. Somewhat related to education. With higher education, some of my friends are questioning whether they’ll be able to do a good job as parents given the pressure cooker environment over here i.e. from here on out the pressure is only going to go higher and they are taking a pity on the next generation.

    1. sunny

      1. Has there been any study re the impact of progressively worsening environmental pollution (air-water-food supply) on the younger sections of the Society both in China and India.

      2. Effect of increasing OBESITY in the wesy especially USA on the morbidity and mortality in the coming years/decades

      3. IMHO and by observation+Stats, Obesity and increasing premature deaths are significantly incrasing in the 200-300M middleclass in India who (unfortunately!) adopting western eating habits+ secondary effects of industrilization

  10. James

    All of which ignores peak natural resources and global warming. The “real world” we actually live in simply will not support 1.2B+ Chinese living the same or similar lifestyles as Americans and Europeans currently enjoy. And won’t they be pissed when that reality finally sets in? The denial among first world imperialist techno-capitalists remains overwhelming. Pride goes before the fall, and all that…

    Global Warming’s Terrifying New Math

    1. BondsOfSteel

      Yea. As a Malthusian, I’m wondering why everyone is upset over the lower birth rates. As a species, I personally think it’s our only hope.

      Sure, some kinda new plaque would work as short time fix… but long term… say a thousand years… we need to match our consumption of shared resources to our population.

      1. James

        If the above link is anywhere near correct, humanity doesn’t have anywhere near 1000 years remaining. Not, at least, in the current configuration.

  11. billwilson

    1. This explains why China has undertaken what would be considered stupid economic policies (excessive accumulation of FX reserves, massive lending to fuel growth, infrastructure building) – they had to get it done while they could (they have always known they had the have to get rich before they get old problem).
    2. China also knows that it needs to have a population around 500-600 million to have a sustainable economy and environment. But it takes time to get there.
    3. China is on the verge of a major slowdown – as in really big – just as has happened to any country that has accumulated such a disproportionate level of FX reserves (see US 1929 and Japan late 80’s).

  12. Capo Regime

    Implicit in the work is the conventional wisdom. More growth requires more people! Growth good and well you needs lots of new consumers! Aging is the inevitable step toward the shrinking of a population and the transition is of course difficult. If demography is destiny then Pakistan and Nigeria should be going great guns! Maybe the Chinese will import more young people? Though based on U.S. and EU importing large numbers of low skilled people is hardly a recipcie for success.

  13. Tantalizing

    China’s productivity growth (it lags FAR behind, say, France) will handle the support of its elderly.
    Its Communist government will see to it that the gains accruing from productivity will be shared equitably. They’ve already initiated a GINI-improvement program in the provinces.
    Remember, ALL of the Steering Committee are numerate. They’re engineers who understand stats and trends. As they prove, regularly.

  14. kevinearick

    step aside, and the political scum breeds itself to death every Single time. That is History.

    Nature is several orders of magnitude more powerful than any and all government, because its has much better R, diversity, and Nature itself is but a dot in the landscape that is the universe.

    I will only work with married people, raising families, and I will fire any that are allowing their children to run the streets as hoodlums, regardless of what any manufactured majority says or their masters do.

    Like the bee, I am a laborer. Try to stop me at your peril. That is UNION, not the mealy-mouth, bankrupt, devoid politician projected before you by self-serving empire TV.

    Go ahead; prove me wrong.y

  15. Generalfeldmarschall Von Hindenburg

    I don’t think there’s much of a future for “growth” oriented economics.

    As to China’s demographics, changing their one child policy now is not going to help much in the next 25 years. And then there’s that question of what you do with all the people expecting late 20th century American lifestyles.

  16. Min

    To what extent is this a problem with the distribution of wealth? If the elderly were wealthy would we think their retirement to be a social problem? Centuries after the Industrial Revolution we have quite a number of labor saving devices, and now cybernetic devices. In the 20th century, why did we in the developed world not enjoy the era of general plenty foreseen by thinkers at the beginning of the Industrial Age? Is it not because we did not share the wealth? On a per capita basis, is China not as wealthy as a number of developed countries in the mid-20th century? Is it not wealthier than Victorian England?

    China has a long, long history of respect for the elderly. That will help them face their demographic challenge. They also have a long history of collectivism instead of individualism. Also, despite their embrace of free enterprise, they are still socialist. There are a lot of ifs there, but redistribution of wealth should face fewer challenges than it would in the capitalist, individualistic West.

    What if, for a generation, China enjoyed a general prosperity comparable to the US in the 1950s? How bad would that be?

  17. enouf

    Why is Individualism considered diametrically opposed to Collectivism? .. oh right, they’re “isms”

    – Respect Individual Rights
    – Work towards a common goal Collectively

    What’s the problem?


  18. tone

    history repeats itself and nobody reads that history repeats and because history repeats itself and nobody sees that history repeats itself… more people thrown out of workforce means that they need to find a ‘makework’ job, like selling door to to door ‘new contracts’ for ‘home utilities’ [public utilities sold to privateers’ which need office people to monitor the contracts which needs more government monitors… and the GFC stuffed up the pension plans ‘cos ‘Wall St smarties’ made a quick profit and buggered off before being brought to justice… And then there is another election and no accounting for bad accounting

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