As a finance guy whose area of interest is financial stability and the impact of short-term adjustments on the economy, I usually don’t spend a lot of time thinking about what might happen in the next few decades, but because of the significant and historically unprecedented demographic imbalances we are seeing in the world today, and especially in China, in spite of myself I have found myself paying attention to demography. In that light a few weeks ago I began hearing rumors that the Chinese government was seriously considering revising the one-child policy.Yesterday a number of newspapers around the world carried articles on the topic. This is what The Times of London had to say:
China's political leadership is considering ending the country's hated “one-child” policy because it is damaging the economy and creating a demographic timebomb, a senior minister admitted today.
Zhao Baige, Vice Minister of the National Population and Family Planning Commission, revealed that there is concern at the highest levels that the policy is already tearing apart the fabric of society.
"This has become a big issue among decision makers," Ms Zhao told reporters at a routine government press conference in Beijing. "We want incrementally to have this change. I cannot answer at what time or how."
…Ms Zhao suggested that long-term planning on how to bring the policy to at least a partial close may already have begun."The attitude is to do the studies, to consider it responsibly and to set it up systematically," she said
There have been similar reports in the past about a reconsideration of the one-child policy.So far nothing much has happened and this may be another case of more of the same – it usually takes a crisis to get the leadership to reverse course dramatically.Still, as things stand today China has a real demographic problem.
Not only is the population aging at an alarming rate – it is among the most rapidly-aging countries in the world, and the only low-income member in the club of rapidly-aging countries – but it has a serious sex imbalance with about 60-70 million more males than females. Along with the rate of aging the sex imbalance is also supposed to be a consequence of the one-child policy, although sex imbalances in other Asian countries without birth policies suggest that the reason may be more complex.As for the rate of aging, I don’t have the numbers in front of me but I think I remember that today just under one in ten Chinese is above the age of 65, whereas in twenty years just over one in four will be.Please don’t quote me on this because I am relying on my terrible memory for the ratios, but certainly China is aging rapidly.
That makes the need to address the one-child policy more urgent than ever.The members of China’s big baby boom of the 1950s and early 1960s are for the most part still working, but in ten to twenty years they will be moving into retirement, and the number of working age people whose efforts will be needed to support them is not growing nearly as quickly. To solve the problem China needs more young people.
The problem is that while a relaxation of the one-child policy may be very good for China in the long term, and perhaps even necessary if China is not to suffer a terrible old-age crisis in the next few decades, in the short run it may create even more demographic challenges that may make the authorities less willing than ever to move.
For that reason it is worth considering what the impact of a relaxation of the one-child policy might have in the medium term.In the long term birth rates would probably decline naturally in China as they have everywhere else. I read one poll that suggested that most urban Chinese said they wanted to have at most two children, and I think in twenty or thirty years Chinese fertility, even without a one-child policy, would be similar to that of many other urban Asian countries.
But in the short to medium term if the one-child policy were to be relaxed there would almost certainly be a baby boom. That suggests that for the next 20-25 years China’s dependency ratio, which is already expected to deteriorate dramatically after 2010-2011, will probably get a lot worse before it gets better.A smaller proportion of China’s population, in other words, would need to produce the goods and services – including expanded health care, education facilities, and a social safety net – needed by a rapidly-growing elderly population and a rapidly-growing population of children.
As an aside, my friend Dan Rosen and I have in the past discussed the evolution of China’s trade balance and foreign currency reserve position, and Dan has argued, and I agree, that one consequence of China’s aging population may be future pressure on the trade account.It may not be irrational, in other words, for China to accumulate such a huge stockpile of foreign exchange reserves because for some period in the future China may be forced to pay for demographic adjustments and finance a trade deficit by liquidating foreign holdings. If China were to experience a baby boom in the near term the pressure would be even greater.
There are several issues here. First, the retire age in China is pretty low. Correct me if I am wrong, current official reitring ages are 60 for male and 55 for female. Of course this is oversimplification, but the actual retiring ages are 55 and 50 in in most places.
When young labor forces kind of squeezed old ones out of labor market in past few years, the current dependency rate will be lower than your estimate. Let say in 20 years, young work forces as a percentage declines. There is room to hold the dependency rate by extending the official retiring age, i.e., 65 for male and 60 for female. There will be 5-10 years room and it will have a positive impact on the dependency rate.
Another factor is that China never reached the full employment level. There are also a huge number of "illegal children" in rural areas.
In summary, the downside demographic risk will not be that large. Regarding Japan, even Japan has a declining dependency rate. Its trade balance does not suggest that they actually use trade surplus to compensate their social spending. I would guess that Japan's problem is somehow irrelevant to demographic facter but related to an inefficient labor and market.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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January, 2008
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