The China Syndrome: Becoming old in a younger world

There are two aspects to the China crisis that is worrying the world. One is the financial system that finds itself in a deep mess of its own making. The other is the economic slowdown that is inevitable. Let’s deal with the first first.

Stomachs churned when on “Black Monday” August 24, 2015, China’s stock market endured its biggest one-day fall since 2007. Since stock markets the world over are united by the same nervous system, the contagion spread across the globe. Commodity prices fell below levels not seen since 1999. Germany’s DAX index fell to more than 20% below its peak. American stocks whipsawed. It seemed like 2008 once more. 

But stock markets are places mostly inhabited by irrational people, prone to irrational exuberances and irrational gloom. Understandably so, for their living is made on the twists and turns of electronic highways through which money belonging to great corporations and individual savers, pension funds and insurance companies, and nations travel at warp speed. The world has lived through stock market crises before and has now the ways and means to recover fairly quickly from slumps. The Chinese slump has passed by, but the aftershocks are still felt.

The fall in oil prices from its $94.75 mark last year into the 30s now and probably into the low 20s before long has had its effect on China’s giant export machine. China built huge capacities in anticipation of growth as usual, but did not anticipate the oil glut caused by new discoveries and shale oil in the US. Clearly oil exporters are hurt and the world exim traffic has slowed down. But this too will pass and the world will get used to a lower economic trajectory. As will China.

But China has also simultaneously hit an impenetrable economic wall. The People’s Republic has a people crisis. It has now stopped growing and is getting old. The reason is paradoxical. China’s one-child policy worked exceedingly well for it. By preventing almost 400 million births since 1979, it gave the living Chinese greater prosperity. It is estimated that between 1980-2010, the effect of a favourable population age structure accounted for between 15% and 25% of per-capita GDP growth. That bonus to the demographic dividend has now ended.

Since the advent of the one-child policy, China has had 336 million abortions and 193 million sterilisations. By all yardsticks, the one-child policy was a spectacular success. But it came at a huge cost, not anticipated then.

China’s population is expected to stabilise in 2030 at 1.391 billion, moving at a slow crawl from 1.330 in 2010. In 2050, China is projected to decline to 1.303 billion.

The flattening population and its somewhat unfavourable demographic profile has been causing concern in China for some years now. In 2013 the CPC’s Central Committee allowed couples to have a second child if one parent was an only child. But Chinese families have gotten used to one child existence. The demographic wall is not going to be crossed. China’s workforce is not growing any more. In the decade 2015-2025, at present trends China will add only 5 million to its workforce, when in the previous decade it added as many as 90 million. In 2010, there were 116 million people aged 20 to 24; by 2020, the number will fall by 20% to 94m. The size of the young population aged 20-24 will only be 67m by 2030, less than 60% of the figure in 2010.

One immediate consequence of this slowdown is that by 2030 its above 60 years cohort will increase from 180 million now to 360 million. The other immediate economic consequence of this is that its savings rate will precipitously decline. 

As a nation climbs the economic ladder, people inevitably live longer, but old age is also more expensive. For instance in the US, the old actually consume more than the rest due to medical expenses. Either they support themselves or families have to support them. Apart from low consumption in the first few years of life, consumption is reasonably constant over the life cycle. But while income is earned, and output produced, in the working life between 20 and 65, it is not so before and after. This ratio of working age and non-working age cohorts is called the dependency ratio. As Indian, African, and surprise, surprise, the US dependency ratios turn increasingly favourable in the coming decades, China’s goes downhill and it will join Europe and Japan as the world’s aged societies. 

China’s total fertility rate — the average number of children born to each woman — is among the lowest in the world, at only 1.4. The developed world average is 1.7. Replacement rate is 2.1, meaning that at this rate the number of births and deaths will be balanced. India’s is 2.5. At purchasing power parity (PPP), China’s per-capita income is just a fifth or less of other large economies. But China’s fertility level is far below that of the United States, UK or France (all around 2.0), and is on par with those of Russia, Japan, Germany and Italy — all countries with sharply declining populations. This is a big reason why Germany so readily accepted to take about a million refugees from Syria and Libya.

Over the next 20 years, China’s ratio of workers to retirees will drop precipitously from roughly 5:1 today to just 2:1. Such a big change implies that the tax burden for each working-age person must rise by more than 150%, assuming. This assumes that the government will maintain its current level of tax revenue. In addition, mounting expenditure on pensions and health care will put China in a difficult position. If the government demands that taxpayers pay more, the public will demand better scrutiny of how their dollars are collected and spent. This could very well open the floodgates of challenges to the CPC?

Can China succeed to get out of the low growth rate cycle? The conditions now are against it. The cost of rearing a child in China has now gone up hugely. The state may require more children, but most families will find the costs unaffordable. This is mainly because China is now a predominantly middle-class nation. How will this policy reversal pan out for China? Demographers give three scenarios. The highest outcome will mean 1.43 billion in 2050, while the more plausible outcome will be between 1.35- 1.37 billion. Either way it is not going to alter the future very much for China. It will become old before it becomes rich.

The writer is an economic & political analyst