Does it matter if China gets old before it gets rich?
Craig Botham explains why China’s demographic decline may be less of an issue than the medicine required to offset its impact and support strong economic growth.
It is well known that China faces an ageing problem. The popular narrative has it that China surged up the growth league tables on the back of its giant population, reaping years of demographic dividends to become the world’s second largest economy. In this narrative, China’s population is now ageing and so this growth story must come to an end.
In this paper we explain why we think this is only partly right; there is no question that China is ageing, but we disagree that this necessarily spells a disaster for growth or investors.
China’s working age population has peaked
As the chart below highlights, the peak in China’s working age population has come and gone, and from here the workforce will shrink in absolute terms, and as a share of the total population, which will itself decline from 2027, according US Census Bureau projections 2019.
Source: US Census Bureau, Schroders Economics Group. 13 February 2019
A look at the median age over time reveals how rapidly China has aged, and will continue to age. On this measure, China will become older than the US in 2021, and will be as old as Japan is today by 2045. Whether this means China grows old before it grows rich is subjective, in that it depends on your definition for both old and rich.
Chinese trend growth: the Solow perspective
We conclude that an ageing workforce, on its own, does not necessarily mean China can never become rich. Provided labour productivity is high enough, growth can be maintained in the face of a declining pool of labour.
Following the Solow approach, we decompose economic growth into three main elements: growth in the labour force, growth in the capital stock, and growth in what is commonly called total factor productivity (TFP); essentially the efficiency with which we combine labour and capital, and which is boosted by technological progress.
Apparent from our analysis is the fact that China has managed to grow, and can continue to grow, at a robust pace independently of the evolution in the size of its labour force. The ageing of the workforce will take time to become a noticeable drag and can be partially offset by labour market reforms aimed at boosting participation rates amongst older workers. Far more important for the Chinese growth story is the productivity of the workforce, not its size.
Reforms to support total factor productivity are of key importance. Made in China 2025 is an explicit attempt to move up the value chain of production, in doing so greatly boosting the productivity of both capital and labour. However, other measures such as land reform may be contentious, given the fundamental clash between Communist Party ideology and the concept of private land ownership.
Given the right policy mix, China’s demographic decline is less of a problem than it appears. The challenge will be achieving that policy mix under a leadership that sees part of the solution as politically unpalatable.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.