My Blog

May 13, 2008

With yesterday’s bad April CPI number, the subsequent increase in minimum reserve requirements to 16.5%, and the slowing will-they-won’t-they appreciation of the RMB, it is tempting to stick to monetary topics in this and the next few blog entries, but regular readers know what I am going to say anyway.  First, inflation may get a little better in the next month or two (although I wouldn’t bet on it), but by now it is pretty clear, at least to me, that this is a monetary phenomenon and, given the continued recent expansion in the domestic money supply as reserves pile on, we are going to see non-food inflation surge in the coming months. 

Second, as far as the slowing of RMB appreciation is concerned, I bet this is going to be a very temporary phenomenon, and is probably largely a response to the dollar’s appreciation against the euro.  But this new strategy (or revival of a failed old one) is not going to improve the worsening monetary dynamics.  Reserves are going to continue to surge, driven increasingly by hot money rather than the trade surplus, and with inflation rising and still no sign of an economic slowdown it is just a question of time before the monetary authorities throw in the towel and go for the one-off appreciation.  Nothing else will work.  By the way last night I had dinner with a group of Chinese academics, including a very famous and influential finance scholar (who for obvious reasons shall remain nameless), and he said there was little doubt in his mind that a one-off revaluation was the only solution left to the country’s monetary problems.  Our only disagreement was that he said it should be a 10% jump, whereas I think that is too little and is only likely to encourage speculative inflows.

Interesting as all this is, however, in this blog entry I want to change the subject to something very different and with much longer-term implications.  I spent the last week going thorough historical and projected population data for China by age group, and the most interesting summary of the data I have put in the table below.  It shows the growth rate of Chinese population by decade (of course these are average annual growth rates for each decade), as well as the growth rate of subcomponents of China’s population.  Given the way the data is presented I am defining “Young dependents” as anyone 19 or younger, and “Old dependents” as anyone above the age of 65.  “Working population”, of course, is everyone else.

To summarize the raw numbers, China’s population is expected to grow from 1.32 billion today to 1.46 billion in 2030, after which it will decline slowly, to around 1.42 billion in 2050.  Its working population is currently around 840 million.  This component of the population will rise in the next ten years to around 910 million and then will decline quite rapidly to around 790 million by 2050.

The graph below shows the composition of China’s population by age group.  Needless to say the most dramatic change is the explosive growth of the over-65 population, followed by the decline in the share of the young.  Another way of understanding this is to note that China’s median age basically climbs over this period from 24 to 45 (which, by the way, may have favorable consequence for long-term political stability).

The graph shows the consequence of these differential growth rates on the age composition of China’s population.  Notice that the Y-axis begins at 50%, so the working population is much bigger than its share of the graph might indicate.  As is nonetheless evident, the real interesting story here is in the age composition, especially in the growth of the over-65 population.  In 1990 China had about 63 million people over the age of 65.  Today that number has grown to around 109 million.  The rate of growth really starts to pick up in the middle of the next decade so that by the year 2050 China is expected to have about 350 million people over the age of 65 – this, for comparison sake, is more than 15% bigger than the total current population of the United States.  The ratio of the elderly rises from 5% of the population in 1990, to 8% today, to an expected 25% in 2050.

The graph also indicates that, thanks to the baby boom in the 1950s and the implementation of the one-child policy beginning in the mid-1970s, China has enjoyed a huge demographic dividend beginning around 1970 or so, when people of working age comprised around 51% of the working population (one worker for every non-worker), to 2015, when they will comprise around 65% of the total population (one and one-half workers for every non-worker).  Their share is then expected to decline to around 56% of the population by the middle of the century.  During and after the 1970s, the working population exploded as the baby boomers joined the work force, but with very few children being born, even the very rapid growth among the elderly (thanks, I assume, to significant improvements in health care) meant that China’s working population grew much faster than its total population.  Even if worker productivity were constant (and it wasn’t – it rose dramatically), the consequence would be a sharp improvement in per capita income and living standards.

I don’t have the figures yet from before 1990, but looking at other sources I would guess that China’s working population grew by about 2% or more annually during the 1970s and 1980s.  In the 1990s, as the table indicates, the growth rate of the working population slowed to 1.72%, declining further in the current decade to around 1.42% on average.  The number of working Chinese keeps growing until around the middle of the next decade, and then begins to decline by about half a percent a year.

Actually these numbers might understate the change, since as China transitions from a largely rural society to a largely urban one I suspect that the definition of the working population becomes more rigid.  In a peasant and rural societies, in other words, the definition of working population is probably a lot more flexible, and many too-young people and too-old people do the same work that the working population does.  As the society becomes increasingly urban, however, young people are expected to go to school and old people to retire, so their contribution to the work force probably declines.  This suggests that the real working population may have grown a little more slowly in the past decade or so and may decline a little more rapidly in the coming decades than the age numbers indicate.

All this has important implications both for nominal growth rates and per capita growth rates in the next few decades.  For one thing, a country’s GDP growth rate can be expressed as a factor of the growth rate of its working population and the growth rate of average productivity per worker.  As the growth rate of the working population swings from positive to negative – by a little more than 2%, depending on what periods you compare – this will have a commensurate impact on Chinese GDP growth rates, i.e. all other things being equal (which of course they are not).  China’s equilibrium growth rate should be about 2% lower than the equilibrium growth rate of the past two or three decades.

The other thing worth noting is that beginning some time in the next decade, China’s working population will begin to grow more slowly (or shrink more quickly) than its total population, suggesting that the demographic dividend it has enjoyed during the past three decades will become a demographic tax.  Per capita income, in other words, will grow more slowly than the growth in worker productivity. 

Since total consumption is a function of the size of the total population and its income per capita, and total production is a function of the size of the working population and its productivity, the demographic relationship between total production and total consumption also will change.  Remember that a country has a trade surplus if it produces more than it consumes, and a trade deficit if it consumes more than it produces.  This implies that over the last three decades China has had a demographic bias towards trade surpluses (working population, a proxy for production, grew faster than total population, a proxy for consumption), but over the next three decades it is likely to have a demographic bias towards trade deficits.  

This doesn’t mean, of course, that China necessarily ran trade surpluses during the last three decades (in some years it ran deficits) and will necessarily run trade deficits over the next three decades.  Other factors, including most obviously changes in worker productivity and savings rates, matter too.  But it does mean that since demographic conditions contribute towards the relationship between consumption and production, in China we are going to see a switch in those conditions from a bias towards trade surpluses to a bias towards trade deficits.

Three years ago I argued in a Wall Street Journal OpEd piece that because of the aging and declining populations of Europe and Japan (and to a lesser extent China and Russia), compared to the growing population and relatively stable age distribution in the US, it was not unreasonable for the former countries to run large current account surpluses with the US since they would need the accumulated claims against the US to pay for the current account deficits they would need to run to manage their demographic adjustments.  This is why I have never been terribly worried about the sustainability of the US trade deficit.  In the next decade it is likely that demographic changes will create pressures to reverse those US trade deficits.

It also suggests at least one extenuating circumstance explaining the very mercantilist trade policies followed by the Chinese government.  As they are probably very aware of the dramatic demographic adjustments China will need to make in the coming decades, it is reasonable for them to want to accumulate claims against the US to pay for these adjustments.  Of course now, I think, their policies have caught them in a monetary trap from which it is very difficult to escape and which is causing balance sheet havoc.  Still, after their upcoming monetary adjustment, however painful, I expect them to continue favoring export oriented policies.  The only certainty about their demographic future is that there will be a difficult adjustment from a rapidly growing working population to a rapidly shrinking working population.

Comments (25) for "Demographic projections and ...

Great post, I think the looming demographic crunch in China is something China bulls generally overlook; I have posted on this issue several times on my blog (and on the impact of Japan already reaching a demographic tipping point); in China new workforce entrants will almost halve over the next decade to 13m by 2020. Demographics are national destiny, and the one forecast economists can make with total confidence! It is remarkable that the median age of the US population is and will remain lower than that of China for the foreseeable future (thanks largely to Latino immigration) and makes me a long term bull of the US economy and assets despite the current bearish consensus. By Sean Maher - 5/12/2008 6:41 PM

The demographic crunch is something that people have been projecting since the late-1970's when the one child policy was instituted and explains why China is saving huge amounts of money as well as investing large amounts of money in physical plant. You use cheap labor to build factories and roads that will keep running once the cheap labor disappears. It also explains why the China Investment Corporation is a pension reserve fund. By Twofish - 5/12/2008 7:47 PM

The US has it's own demographic issues, but the obvious solution to that is massive immigration. This makes efforts within the US to discourage immigration seem quite bizarre and economically suicidal to me. By Twofish - 5/12/2008 7:49 PM

Yeah agreed, but the US has proven itself culturally and politically flexible enough to absorb recurrent immigration waves, whatever about the recent 9/11 inspired xenophobia; monocultural countries like Japan, China and Russia (20% population fall by 2040) are in a much weaker position to mitigate demographic decline. By Sean Maher - 5/12/2008 10:09 PM

Given the chorus of calls for revaluation (accelerated, one-off etc) and playing the hypothetical that the PBOC at least internally sees the wisdom behind it, begs the question: when? Will the PBOC want to wait after the Olympics? I would tend to bet not. The increased demand during and immediately after the Olympics may dampen some of the pain associated with a revaluation. (The PR perspective might be different but I doubt that demand stemming from Olympics tourism is very elastic). A few thoughts about the demographics models: - Median lifespans have tended to increase because of medical advances, better hygiene etc. However, medical advances are also costly. i.e. not only are people living longer, but its costing a lot more to live longer (in a lifestyle that consumes rather than produces). The low-hanging fruit: improvements in hygiene and basic care I think are going to be plucked soon (if we are not already past that point) - True of China and many developing countries -- the levels of pollution (air, industrial) has not yet begun to impose its costs on society. My impression is that prevalance of smoking in these countries is high (and increasing). Its my conjecture that while people may live longer, they will be a lot sicker in their old age. - Increased urbanization also exposes people to more pathogens -- the increase in risk of epidemics. By MC - 5/13/2008 3:39 AM

Jeez, still believe the illusion of uniqueness of cultural and political flexibility? For one, immigration xenophobia is always about economy and job. Security is just a convenient reason. I am not sure about Japan and Russia. But China has thousands of years of history of integrating other ethnics. I can claim that it is culturally flexible to immigration. Current policy system makes it flexible to change the birth policy or immigration policy. So you have political flexibility in China. Please get over those soft arguements. By fatbrick - 5/13/2008 6:14 AM

Fatbrick, I am not so sure about the assertion/generalization that "immigration xenophobia is always about economy and job." You are right about the "economy and job" are significant factors directly linked with xenophobia, but there are other material reasons attributing the fear. For instance, can you imagine a sizable group of Vietnamese or Indian starting living among the residents in Beijing and have their onw Viet-Town or Indi-Town? I think China has thousands of years experience of sinisizing other ethnics rather than integrating them... Talking about the potential game changing event, what are the off-chances that a violent regional war breaking out? Rice, oil, mineral, land are only getting less and less... By zh - 5/13/2008 9:31 AM

The shift in China is not just ageing of population, but also a decrease in population, after peaking in 2026 at 1.45 billion, down to 1.36 billion by 2050, and 1.05 billion by 2100. Socially and economically, population ageing need not all doom and gloom. http://www.theage.com.au/news/Ross-Gittins/Good-news-about-our-ageing-population/2004/11/30/1101577480865.html We are living longer and living healthier. The ageing process will certainly shift our focus away from growth to value. Housing needs will shift from big family homes close to schools, to smaller townhouses close to hospitals. Utility stocks, and their consistent dividends, will be back in fashion again. Demand for resources will slow down, making the world cleaner and safer. By Kelaido - 5/13/2008 12:41 PM

" For instance, can you imagine a sizable group of Vietnamese or Indian starting living among the residents in Beijing and have their onw Viet-Town or Indi-Town?" zh, why not? Actually in Beijing there is an area (Wangjing) where many Korean live and work, just like a China town in big cities in U.S, with Korean language signs everywhere. I am sure lots of Beijingers had heard of it. By fatbrick - 5/13/2008 12:43 PM

There is also an issue of size, relative prosperity and absorption capability. A few million immigrants will have four times the impact on age distribution in the US than in China. Because the US is so much richer than any other country, and of course far richer than a poor country like China, it is also far more likely to attract immigration. There isn't much history of poor countries acting as magnets for immigration except in response to natural or man-made disasters in the emigrating countries -- and I cannot think of any comparable case where these immigrants were easily absorbed. Finally, the absorption of immigration in the US is supported by social, cutural and economic insistutions that have existed more or less continuously thoughout its history, whereas other countries have had great diffiuclty in absorbing immigrants effectively. China has seen far more emigration than immigration, and I suspect that it would not absorb significant immigration very easily, espcially given the social and political implications of large-scale immigration. By Michael Pettis - 5/13/2008 12:49 PM

Preferred immigration destinations must hold the promise of a better economic life. Since the Industrial Revolution, the flow is frm East to West. Thats why the last major exodus of Vietnamese boat people opted to re-settle in western countries than the ethnically closer China. Within the context of ageing in decades, and even centuries, opening doors to immigrants will steepen the population age profile quickly, but it is robbing Peter to pay Paul. For every migrant a country gains, two other people in a different country must work hard TOGETHER to deliver the goods with a lengthy lead time. Until we know how to synthesize water from silicon, and manufacture arable land from factories, the world we know will become more stressful, and thus more dangerous if our aim is to grow working age population faster than its ageing population. Right now China is attracing the right type of migrants: expats and businessmen. They pay taxes, without any retirement entitlements. By Kelaido - 5/13/2008 2:28 PM

One large factor in Taiwan is "marriage immigration." Females tend to marry higher on the socio-economic scale which means that you have Taiwanese females emigrating, and this means that you have lots of rural Taiwanese men that marry women from the Mainland, Vietnam, or the Philippines. In the case of Mainland China, this is going to be made even stronger by the demographic bias toward males, so I expect to see huge amounts of marriage immigration from Burma, Central Asia, and possibly Bangledesh, the Middle East, and Africa. By Twofish - 5/13/2008 8:04 PM

Fatbrick, I am not so sure about the assertion/generalization that "immigration xenophobia is always about economy and job." You are right about the "economy and job" are significant factors directly linked with xenophobia, but there are other material reasons attributing the fear. For instance, can you imagine a sizable group of Vietnamese or Indian starting living among the residents in Beijing and have their onw Viet-Town or Indi-Town? I think China has thousands of years experience of sinisizing other ethnics rather than integrating them... Talking about the potential game changing event, what are the off-chances that a violent regional war breaking out? Rice, oil, mineral, land are only getting less and less... By zh - 5/13/2008 9:11 PM

Apologies for inadvertantly posting the same comment again. Pls disregard. By zh - 5/13/2008 10:27 PM

There is one very importent issue that has not been mentioned in this debate, and that is the early retirement age of the Chinese workforce. The demographics shown above count the under 65s as being part of the workforce. I would argue that the real workforce retirement age is at least 4-5 years lower then that. If I were a little more sensational I would have said 10 year, but there seems to be little statistical back for that. The points is that this would really put your numbers in perspective. I agree that the demographic of the Chinese population will determine their economy in the years to come, but it is still possible to reverse all of this, just by opening the floodgates with a 2 - 3 child policy. If done in 2010 then the numbers for the category "young dependents" would change for the years from 2015 to 2030. Still this is a very importent subject that need all the attention it can get By Anders - 5/14/2008 5:12 PM

Anders, reversing this is much harder than you say. The economic issue is not how to maximize the number of young dependents but rather how many workers they have to support the population's consumption needs. If they relax the one-child policy there would indeed be an explosion of children, all of them dependents of course, and for the next 18-25 years the dependency ratio would be much, much worse than what I have indicated. This would put a very heavy burden on the economy. According to rumors this is one of the main reasons they haven't been eager to relax the one-child policy. As for the real retirement age being under 65, as far as I know there is no reason to assume that people in China above 55 or 60 cannot and will not be able to work during the next few decades. As it is they are unlikely to get much pension anyway, and I doubt that in the future the majority of Chinese will be pensionable at 55, espcially given that this would raise the number of retirees from one-quarter of the population to one-third (and total working population equal to only 48% of the total). They will still need to work and be able to work, especially if high dependency ratios mean that they can't live off their children. By Michael Pettis - 5/14/2008 5:57 PM

Sorry, what is a "one-off" currency adjustment? Does all this mean that I am better off leaving 20,000 RMB in a China Argricultural Bank for a bit, rather than bringing it back to the states and converting it asap? Inquiring minds want to know. By Fiskadoro - 5/14/2008 7:00 PM

Sorry, what is a "one-off" currency adjustment? Does all this mean that I am better off leaving 20,000 RMB in a China Argricultural Bank for a bit, rather than bringing it back to the states and converting it asap? Inquiring minds want to know. By Fiskadoro - 5/14/2008 7:01 PM

Micheal, The argument is, that the sustained growth in GDP over the next 10 - 15 years should be able to pay for an increase in the young dependents. This meaning that the Chinese economy should invest its trade surplus in sustaining a rise in young dependents. I point this out because there are very good arguments, why the retirement age is not as high or will be as high as you claim. The older Chinese generation educated before 1985 will have a hard time staying in the work force as the complexity in the production system increases over the next 10 years. I would still question their desire to continue working. I have not had the time to look into retirement numbers in the yearbook, but will return with a trend later. There also seems to be a consent among many Chinese that the retirment age is around 60 or even 55 and I have seen little from the side of the goverment to change this. The cultural change with children not supporting their parents will after my opinion not happen within the next 10 years. So all in all there are good arguments for the Chinese to bet on a short term rise in young dependents and the Chinese society is very good at giving basic education (reading and writing skills) to a huge population as they showed us in the period from 1960 to 1980. By anders - 5/14/2008 7:26 PM

Fiskadoro, do not sell your RMB just yet. Anders, you may be right, which makes the dependency problem worse since you are effectively saying the work force might be an even smaller percentage of the total population than my already dire numbers suggest. Still, as China moves increasingly to a service economy, that may create greater flexibility in the skills requirements. By Michael Pettis - 5/14/2008 7:45 PM

Micheal I think your argument is right and that the Chinese work force will "get old too fast" Hoping that a service sector boom will save them is a little too early to call yet, there is no OECD backing for that transformation as of 2002. I think the argument that the US is able to pay off it debt in furture because of a strong flow of immigrants seems very convincing, which should make those who underestimated the US economy think again. The vote is still out on how China takes to immigrants as the recent VISA action shows us. Fiskadoro You should still think of the rising inflation in China, so if you live in the U.S cash in and buy stuff now because the dollar is going up. By anders - 5/14/2008 11:12 PM

The pension age for Chinese workers is 60 for men and between 50-60 for women. Much of the reason for setting it to be low was so that workers would be "retired" rather than "unemployed". By Twofish - 5/15/2008 12:00 PM

For those baby boomers born after WW2, life has not been easy: 1950's - no food - as growing pre-teens and teens in need of food, there was food shortage as country suffered a great famine, 1960's - no education - just as they reached high school and college age, Cultural Revolution postponed education in classrooms, 1970's - 1-child policy - just as they reached age of having offsprings, they could not have more, 1980's - no money - just as earning power tend to increase at this age, lack of education make them difficult to compete for high wages as country transitioned to market economy, and inflation started to bite, 1990's - no career - just as careers tend to take off around this age, they were not old enough to be respected seniors and communal leaders, nor young enough to adapt to new open economy, 2000's - no retirement - only 1 child to depend on in old age.... By Kelaido - 5/16/2008 7:35 AM

It's one of those things where good or bad depends on your standard of reference. People born after World War II had things a lot better than people born before World War II. Being unemployed is no fun, but at least you aren't being shot at. By Twofish - 5/17/2008 3:21 AM

The graph's image seems to have disappeared. The img link points to a local file not one on the server. Cheers. By jon - 5/25/2008 9:14 PM