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 inevitable economic slowdown.
Stomachs had churned on August 24, 2015, labelled “Black Monday”, when 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 to other places. Commodity prices tumbled below levels not seen since 1999. Germany’s DAX index dropped to more than 20% below its peak. American stocks whipsawed. It seemed like 2008 all over again.
It didn’t come to that. Stock markets are places mostly inhabited by irrational people, prone to irrational exuberances and gloom. Understandably so, for they make a living on the twists and turns of electronic highways on which travel money belonging to corporations, individual savers, pension funds, insurance companies and nations. The world has lived through stock market crises before and now has the means to recover fairly quickly from slumps. The Chinese slump passed, but the aftershocks are still being felt.
The fall in oil prices from $94.75 last year into the $30s and probably soon into the low $20s has had its effect on China’s giant export machine. China built huge capacities in anticipation of growth but did not anticipate the oil glut caused by new discoveries and shale oil in the US. Now, owing to the low prices, oil exporters are hurt and the world exim traffic has slowed down. However, this too shall pass and the world will get used to a lower economic trajectory. As will China.
Unfortunately for China, it has 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 in the past. By preventing almost 400 million births since 1979, it gave the Chinese greater prosperity. It is estimated that between 1980 and 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. China’s population is expected to stabilise in 2030 at 1.391 billion, moving at a slow crawl from 1.330 billion 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 Communist Party of China’s Central Committee allowed couples to have a second child if one parent was an only child. But Chinese families have got used to one child existence. The demographic wall is not going to be crossed, and China’s workforce is not growing any more.
Whereas China added as many as 90 million individuals to its workforce from 2005 to 2015, in the decade from 2015, it will, at present trends, add only 5 million. In 2010, there were 116 million people aged 20 to 24. By 2020, the number will fall by 20% to 94 million. The size of the young population aged 20-24 will only be 67 million by 2030, less than 60% of the figure in 2010.
One immediate consequence of this slowdown is that by 2030 the cohort aged above 60 years will increase from the present 180 million to 360 million. The other immediate economic consequence is that its savings rate will decline precipitously.
Torrent of challenges
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 their 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 years, 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) American dependency ratios turn increasingly favourable in the coming decades, China’s will go 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. In contrast, the developed world average is 1.7. China’s replacement rate – the rate at which the number of births and deaths are balanced – is 2.1, as against India’s 2.5. At purchasing power parity, China’s per capita income is just a fifth or less of other large economies. At the same time, China’s fertility level is far below that of the US, 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%. This assumes that the government will maintain its current level of tax revenue. In addition, mounting expenditure on pensions and healthcare 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 Communist Party.
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 increased 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 much for China. It will become old before it becomes rich.