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China will be old before it’s rich

As the leaders of China’s Standing Committee (average age 65) prepare for one of the Chinese Communist Party’s most important occasions, one issue will be hidden in plain view: The country is rapidly growing old.

With its ageing population, China may soon need institutional care for tens of millions of people. Photo: Bloomberg

With its ageing population, China may soon need institutional care for tens of millions of people. Photo: Bloomberg

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As the leaders of China’s Standing Committee (average age 65) prepare for one of the Chinese Communist Party’s most important occasions, one issue will be hidden in plain view: The country is rapidly growing old.

President Xi Jinping, a sprightly 60, is only up to the third plenum of his leadership, an event at which he is expected to set out long-term plans for the country. But the nation as a whole is fast approaching the sixth Age of Man.

In Shakespeare’s version, the fifth stage of human life is a well-fed individual with “a round belly” full of chicken. Unfortunately, China is moving “into the lean and slipper’d pantaloon” of old age before most of its people have grown wealthy. Its average standard of living is somewhere between those of Ecuador and Jamaica.

It is hard to overstate how fast China is ageing. Life expectancy has more than doubled from 35 in 1949 to 75 today, a miraculous achievement. Meanwhile, the fertility rate has plummeted to 1.5 or lower, far below the 2.1 needed to keep a population stable.

Professor Cai Fang, a demographer at the Chinese Academy of Social Sciences, said the country will have moved from labour surplus to labour shortage at the fastest pace in history. In 2011, its workforce shrank for the first time, years before anyone’s predictions.

Japan reached a similar turning point in about 1990. Ominously for China, that was just before its economy sank into two stagnant decades. By then, its living standards were already at nearly 90 per cent of United States levels.

In purchasing power parity terms, the per capita income is still below 20 per cent. “There’s now no doubt,” said Prof Cai. “China will be old before it is rich.”

TIME BOMB TO CHINA’S DREAM

In his book, Stumbling Giant: The Threats to China’s Future, Mr Timothy Beardson identified demographics as the single-biggest obstacle to the country’s dream of becoming rich and powerful. He pinpointed four areas where the population time bomb ticks the loudest.

The first is growth. China is reaching the end of a 35-year period when it was able to conjure gross domestic product simply by shifting workers from low-productivity farm jobs to higher-productivity factory ones. The song of the country’s miracle has a three-word refrain: “Just add people.” Now, it will have to shift to a model where growth is derived from innovation.

Second is ageing. The number of Chinese over 65 will triple to 300 million by 2030. Today, only 1.5 per cent of the elderly are in institutional care. But the low birth rate will make it harder for single offspring to look after parents and grandparents. China may soon need institutional care for tens of millions of people, no easy task for a country with threadbare social services.

Third is the gender imbalance. Because of the preference for male children, there are now roughly six boys born for every five girls. In the next two decades, that will mean tens of millions of men will have no chance of finding a wife. Mostly poorer and with fewer prospects, they could well become a source of social discontent and crime.

Fourth is absolute population. The number of Chinese is likely to peak at below 1.4 billion some time after 2020. Today, there are four Chinese for every American. By the end of the century, that ratio could fall to between 1.9 and 1.25, according to Mr Beardson. If he is at all right, that would have huge implications for the relative weight of the Chinese economy and thus its ability to project military power.

STATE MUST SHRINK

Demographics, then, hangs heavy over a third plenum, whose remit is to set policy for the next decade. If there is an overriding theme, it is that, for the necessary shift in economic model to be achieved, the state will need to shrink its role in the economy.

Few of the gargantuan state-owned enterprises (SOEs) are likely to provide the innovation that China needs if it is to raise productivity. Yet far from shrinking, they have grown, recipients of massive injections of state funds designed to keep economic growth going.

“Just add people” has given way to “just add capital”. But capital is going to the wrong places. SOEs account for a third of GDP, yet suck in perhaps 90 per cent of credit. State-owned banks rarely lend to the small enterprises that are likely to be the motor of future innovation.

To change banks’ habits, the state will need to relinquish control over interest rates and lending — no easy thing for an authoritarian system to do. The state must also shrink in the social arena. A creative society and strict censorship are odd bedfellows.

The hukou registration system, which restricts migration from the countryside to the cities, also exacerbates labour shortages. Scrapping it, though, would mean losing a lever of social control and would risk alienating an urban middle class not obviously predisposed to share its gleaming new cities with country cousins.

The influence of ageing can be exaggerated. India’s supposedly superior demographics creates enormous problems of its own. New Delhi may soon confront a massive population of ill-educated and angry youth without gainful employment.

Equally, headline GDP rates do not matter all that much, except when it comes to national power. Day to day, what counts is living standards, or GDP per capita.

Yet, to keep individual incomes rising will mean profound changes to China’s industrial, financial and social structure. Innovation is not available by decree. Whether such a transformation can be engineered by a one-party state — or whether it is even compatible with a one-party state — is the overarching question of the next few decades.

ABOUT THE AUTHOR:

David Pilling is the Financial Times’ Asia editor.

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