China’s war against aging

The ongoing US-China trade conflict has shifted noticeably in focus from import tariffs to export restrictions. The US is aware of the role of critical technology in a globalised world. Productivity growth driven by technology holds the key to China’s future economic growth. The recent US order to ban businesses from dealing with Chinese tech companies has therefore hit a raw nerve.

"An ageing population is perhaps China’s most-pressing issue at present. An annual increase of five million people is still insufficient to halt the downtrend in the labour force.”

The ongoing US-China trade conflict has shifted noticeably in focus from import tariffs to export restrictions. The US is aware of the role of critical technology in a globalised world. Productivity growth driven by technology holds the key to China’s future economic growth. The recent US order to ban businesses from dealing with Chinese tech companies has therefore hit a raw nerve.

This feeds an increasing perception in China the US is trying to constrain its tech development, just like in 1986 when US policy makers were accused of preventing Japan from a semiconductor take-off. Chinese policymakers view the economic history of Japan as quite instructive, believing many lessons can be learnt.

But Japan has another lesson: demography is destiny. An ageing population is perhaps China’s most-pressing issue at present. An annual increase of five million people is still insufficient to halt the downtrend in the labour force.

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Faced with an ageing population in the 2000s, Japan had difficulty recovering from the property market collapse as the economy was mired in a liquidity trap. China’s current population profile is similar to Japan’s in that time and thus it is wary of Japan’s ‘lost decade’.

Despite China’s one-child policy, implemented since 1979, the national birth rate rose in the mid-1980s as the economy prospered with its ‘open door’ policy. On the other hand, the two-child policy introduced in 2016 had little impact, as birth rates tumbled from 12.4 per 1,000 people to 10.9 in 2018.

Coincidentally, China’s demographic outlook matches the timeline specified in Xi Jinping’s ‘New Era’. By 2035, China’s share of working age population may to shrink below the world’s average.

The contraction of China’s labour force seems to be an irreversible trend. Since capital accumulation is also slowing, China needs to increase total factor productivity to maintain the rise in value-add per labour unit, which is in turn critical to supporting wage growth and consumption.

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Approach

China’s investment-driven approach used to rely on its demographic dividend. A high savings rate had helped to sustain this model in the past. But the savings rate is falling as the population ages, so there is an urgency to shift to a high value-added and consumption-driven economic model supported by a growing middle class.

A simple projection based on the rate of change in 2017 indicates China’s working age population will be below the world’s average by 2035. It will also reach the same level as the US by 2050.

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China’s demographics foretell its interest rate profile. Demographics not only challenge the expectation of high yields in emerging Asian economies but also limit the extent to which central banks can cut rates in the longer term.

Since Chinese investors have a strong property bias, authorities need to manage their property policy carefully to avoid a Japanese-style collapse followed by a liquidity trap.

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China’s demographic trend will likely put downward pressure on interest rates in the longer term. Economic literature suggests an increase in life expectancy encourages people to save more, pushing real interest rates lower. Gross-domestic product growth will also slow due to lower population growth and hence lower investment yields.

Raymond Yeung is Chief Economist, Greater China at ANZ

This story was originally published on ANZ’s Institutional website.