Sunday, December 27, 2009

A US outlook on China's demographic prospects

I will chime in following suit to Edward's discussion of China's prospects with some details from the US Census Bureau's analysis of China’s demographic future. Some excerpts are:

China’s population is projected to peak at slightly less than 1.4 billion in 2026, both earlier and at a lower level than previously projected…The latest projections indicate that by 2026, the population of China will begin to decline. Population growth in China, the world’s most populous country, is slowing and currently stands at 0.5 percent annually. China surpassed the 1.2 billion population mark in 1994 and reached 1.3 billion in 2006…The slowdown in China’s population growth is the result of declining fertility. China’s total fertility rate is estimated to have been 2.2 in 1990, 1.8 in 1995 and less than 1.6 since 2000. China’s fertility rate is currently half a birth below that of the United States, which is more than two births per woman.

Key evidence for the new fertility estimates comes from analysis of data from China’s recent census and surveys. One of the consequences to China’s declining fertility rate is that the number of new entrants to China’s labor force may be near its peak. The population ages 20-24 is projected to peak at 124 million in 2010…Despite a shrinking younger population, China’s labor force may continue to grow for several years since the population ages 20 to 59 (prime working ages) is not expected to peak until 2016 at 831 million, an increase of 24 million from the current estimated level.”

I highlighted several particularly notable statements. The concept that China’s labor force may peak in only six years at a level only 24 million persons greater than current should lead to careful reconsideration of several themes that have been conventional wisdom regarding China. These are the idea of the (practically) limitless labor pool, the idea that economic growth in China can continue to rapidly increase, and the idea that opportunities for market growth in China and outsourcing opportunities to China will increase for the foreseeable future.

If the size of China’s labor force is in fact near its peak then by definition domestic consumption will have to increase some time as those that leave the workforce due to age will be net consumers rather than savers. This could make China even more export-dependent, which is hard to imagine. Michael Pettis makes a solid case that domestic consumption in China has been shrinking in recent years as a share of GDP due to government economic policy.

A shrinking labor force will also make it difficult for China to maintain GDP growth rates. Michael Pettis in another analysis makes an interesting case that China may not be able to increase the productivity of its workforce as rapidly as many think. Since the textbook response to the problem of maintaining growth with a smaller workforce is to increase productivity, this could be a difficult problem. The burden of supporting the rapidly increasing population of non workers will last until the Chinese population as a whole starts to decline.

7 comments:

Anonymous said...

Another abstract approach based on bloodless economics. Totally misunderstood everything. The rapid decline of urban population (after the peak) will simply make some place for rural migrants. Urbanization will multiply labour productivity, wage level and consumption. Newly buildt, cutting edge infrastructure will be saved (from rurals, unemployed and urban vandals)and central resources can be redirected towards health-care, education and social protection. Higher education and better social protection will create another wave of consuption.....etc.etc.etc.
One more thing: China is not an export neither an import economy, it is the only continental economy in the world (reminding me to the US in the early 20th century), it can expand export and domestic consumption at the same time for decades.

Unknown said...

If the size of China’s labor force is in fact near its peak then by definition domestic consumption will have to increase some time as those that leave the workforce due to age will be net consumers rather than savers. This could make China even more export-dependent, which is hard to imagine.

Why should it actually make them more export dependent or maybe it should, but I would believe that the process is about rebalancing China's contribution to global imbalances. And if they assist this process with a more reasonable exchange rate regime, then I don't see where is the problem. They seem to awash in savings and reserves and everything, starting consuming more won't collapse them.

Brett said...

The rapid decline of urban population (after the peak) will simply make some place for rural migrants.

You don't think they already knew that? Even with rural migration, the overall size of the Chinese labor force will peak, then decline - at the same time that the size of the elderly population will be skyrocketing.

Newly buildt, cutting edge infrastructure will be saved (from rurals, unemployed and urban vandals)and central resources can be redirected towards health-care, education and social protection.

Simply throwing money at the issues won't solve them, especially with the Chinese levels of corruption (particularly at the local level where all of this gets implemented).

Anonymous said...

Brett, Chinese corruption is not worse than US or EU, think about the collapse of the US financial sector. The culture of corruption is different. Nobody likes Chinese communist. But their investment will create their yield for sure. They created the biggest and newest highway system of the world within 20 years. The same is happening with their national system of bullet-trains.
I am a citizen of the European Union. Where are the new airports, the all-European high-speed train network, the highway system? Where is a cross-European solar panel program? Do we have an energy policy at least? The answer is no, no, no. Neddless to say, US is even worse.

Anonymous said...

Solar would be idiocy in europe sky high population density + northen latitudes means it just wouldnt work - given the typical energy yield per square meter of solar in europe the area needed to fuel europes energy consumption exceeds EU territory. China is in pretty much exactly the same boat, re: solar. Its a technology that will only ever work out for places with that have deserts to build the plants in.

Anonymous said...

Western China is desert. PV is also an excellent roofing material so cost can be kept low when used as roof

Anonymous said...

Dear other Anonymous,

Solar is a perfect European solution, Egypt, Libia, Tunesia, Algeria and Morocco have the southern, sun-intensive deserts and the European companies possess the technology of power stations and intelligent grids. But it is NOT a technological question. The trouble with Europe is that its economy is continental but policies are still made on the nation state level. In other words, the European disease is impotency. The trouble with US is that its economy and policy-making are captured by the oligarchies of financial capital (since the death of American industrial capital). Consequently, the American disease is fraud.
What is disturbing me in these series of posts is your obvious hatre and frustration because of the Chinese renessaince. New and newer negative posts based on occasional (often ignorant)reports of Western journalists. China is a great civilization and the Chinese are peaceful people. What is wrong with them? The decline of the Anglo-Saxon world is not their fault and only the Americans and British can fix their countries.

Learn Chinese (I did) and travel there. You will see the difference....