Friday, September 21, 2012

China's shifting demographics and their impact

China's changing demographics now pose risks to global economic output for the simple reason that the nation is currently responsible for about 40% of world's GDP growth.

Global GDP growth (Source: DB)

It is therefore important to understand what is driving China's population dynamics (h/t @Frances_Coppola). Here are some facts (also discussed in some detail here):

1. China's population is ageing.
BBC: - Chinese women are having fewer children, but having a smaller generation follow a boom generation - and longer life expectancies - means that by 2050, it is expected that for every 100 people aged 20-64, there will be 45 people aged over 65, compared with about 15 today.
2. Ageing population is expected to have a negative impact on China's labor force growth.

Source: DB

3. Declining labor force will limit economic growth.
DB: - Over the medium term the country will be faced with a more hostile demographic outlook, as labour force growth turns negative [above]. Alongside weaker western world growth, this will help to explain why Chinese growth will moderate from 10-12% to between 7-9% over the next few years.
4. Some argue that the slowdown will be more dramatic and may even result in social unrest.
BBC: - The rapid ageing process will also bring with it political difficulties. The legitimacy of Chinese communist party as a ruling group of the country since the Tiananmen Square massacre in 1989 has been based on its maintaining rapid economic growth.

An economic slowdown could prompt challenges to party's legitimacy.

Existing disadvantaged social groups, such as migrant workers and pensioners, especially those in rural areas, will be most severely affected, and the social unrest sometimes experience in China now could become increasingly common.
5. It seems that China's one-child policy is not necessarily the cause of declining birth rates (although Beijing is convinced that it is). Many will find this surprising, but the decline in fertility may have continued at the same or even sharper pace without this policy (as it did in other nations).
BBC: - China had a remarkable success in fertility reduction in the 1970s, before the introduction of the one-child policy: China's fertility dropped from 5.8 children per woman in 1970 to 2.7 in 1978. The model suggests that fertility would have continued its decline without the one-child policy, and possibly would have declined even faster.

This last point seems to be counterintuitive, but one explanation could be that the policy caused anxiety among the population, which prompted many to have children at an earlier time. There was a decline in age at first marriage and age at first childbearing in the 1980s.
6. The one-child policy however had negative "unintended consequences". They included "forced abortions, sterilisations and sex-selective abortions, which have skewed China's sex ratios; the latest census figures suggested nearly six boys were born to every five girls" (BBC). The skewed sex ratio (119 boys per 100 girls born in 2012) is a dangerous development that could result in social unrest.

7. Population ageing was caused not just by lower birth rates but by a "significant increase in the country's life expectancy. People are living longer life thanks to significant improvements in living standards, including improved nutrition, access to education and medical care" (BBC).

8. However China is not prepared to handle (and fund) the rapid growth in the elderly population.

Source: BBC
BBC: - You can glimpse what China faces in 20 or 30 years in one of the few hospices in Beijing. The elderly and dying are lined up in basic wards, some tied to their beds, some hardly moving at all. All have the illnesses of an ageing population.
These facts are not simply an academic curiosity. Given how uncertain global economic growth trajectory has become, some of these changes in China will be even more impactful going forward.

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