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China's opposing arcs: population and productivity

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Mainstream China watchers focus on immediately tangible items as diplomatic initiatives, growth rates, manufacturing output, energy and raw material demands while leaving more distant items as demography to the statisticians, so it is rare to see China's Time Bomb: The Most Populous Nation Faces a Population Crisis complement the likes of The Graying of the Middle Kingdom.

Highly coercive population controls (such the 1979 one-child rule) begun a generation ago now see families reproducing below the replacement rate of 2.1 offspring -- down at 1.3 to 1.8, even as preferences for male offspring have spiked the number of illegal female abortions. Yes, those practices shaved off 300 million people, but now China is growing old, growing male -- and pampered "only children" at that.

Falling fertility and rising longevity will see working-age population beginning to shrink as current baby boomers begin to retire -- and only 25% will have pensions -- causing a massive dependency burden. Unemployment and underemployment will swing into labor shortage, causing wrenching changes for an economic model that has presumed an inexhaustible stream of cheap labor.

Private savings are now held in state-controlled banks where the bulk is invested in plants and infrastructure with only minor amounts for social welfare. The simultaneous impact of a shrinking labor pool, capital competition, and rising taxes could well impact China's development model. "Graying" points out that recent reforms are not working:

  • Large gaps in coverage
  • Widespread evasion
  • Prohibitive payroll tax rates
  • Empty personal accounts

And that genuine reform in time will be difficult:

  • Lack of central government enforcement
  • Immature capital markets with nascent legal, regulatory, and communications infrastructure
  • No guarantee that personal accounts will be genuinely funded and individually owned

If China cannot depend on the stimulation of state-controlled capital investment and cannot continue to lift the wellbeing of Chinese citizens, one wonders how the CCP (Chinese Communist Party) will retain its "mandate from heaven" to govern, especially so if its contest with the PLA (People's Liberation Army) gets out of hand.

While China could raise retirement ages and consent to ease the one-child rule, I think that these are more at the margin, especially in the medium term. My opinion is that China must vastly increase its productivity and profitability in most if not all critical path sectors.

One would expect exceedingly intense effort to build China's intellectual property base, expand its R&D and university base, increase its investments in "sunrise" industries such as biotechnology, nanotechnology, advanced manufacturing, and agribusiness, while securing long term access to energy and raw materials, making its mainstream manufacturing much more profitable and efficient as well as investing in novel cash generation models.

China's population pyramid for 2000, 2025, and 2050 leaves no room for error. Productivity growth must outpace population decline if China is to grow rich before it grows old.

China's Time Bomb: The Most Populous Nation Faces a Population Crisis
By JOSEPH KAHN
New York Times
May 30, 2004, Sunday

The Graying of the Middle Kingdom: The Demographics and Economics of Retirement Policy in China
By Richard Jackson & Neil Howe
CSIS Global Aging Initiative
Center for Strategic and International Studies
May 25, 2004

International Database (IDB)
U.S. Census Bureau

IDB Data Access--Display Mode
U.S. Census Bureau

Gordon Housworth



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