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China's Long-Run Economic Roadblock

Upside Down Demographics

China again dominates the news cycles with concerns about the trade deficit, thefts of intellectual property, subsidies and threats of a trade war. A popular theme from both right and left is that China’s massive growth and population will overwhelm the US economy, particularly manufacturing.

The news coverage reminds me of the headlines in the late 1980’s about Japan’s economy. Japan was going to buy up strategic industries in the US and dominate world trade. But Japan hit a constraint that was foreseeable, but not expected. Starting in the 1977, the population growth rate dropped as families had fewer children. At the same time, longevity increased. Economic growth peaked in the late 1980’s but then entered a period of long-run stagnation. At the present, Japan’s median-age is the highest in the world and its population is declining by 0.2% per year.

China faces a similar trajectory. In the early 1960’s, China has one of the highest population growth rates in the world and the Communist leaders feared continuing famines if the trend was not reduced. The one-child policy was the Mao-government response. The immediate result was dramatic:

broken image

(By Phoenix7777 [CC BY-SA 4.0 (], from Wikimedia Commons)

The long-term effects, however, are just beginning to show up:

An Aging Population: China’s median-age has crept up to almost 37 years. Most demographers expect China to surpass the US median-age within five years and that gap will widen. At the same time, Chinese are living longer (average 76.3 years, similar to most developed economies). As a result, the old-age dependency ratio (number of working adults compared to those over 65) will rise from 11 per 100 in 2010 to 39 in 2050. (By comparison, the US was at 19 in 2010 and is projected to rise to 36 by 2050).

(If you want to know more about aging, I would point you to the Pew Study on US and Global Aging)

Gender Mismatch: As in many countries around the world, Chinese families, with their Confucian heritage, strongly preferred male children, since they are considered heirs to the family lineage. The one-child policy led many couples to decide to abort female fetuses. There are currently 34 million more males than females. More importantly, in the marriage range of ages 15 to 29, there are 112 men for every 100 women. The implications of this gender imbalance are difficult to predict at this point, but it will undoubtedly lead to serious social pressures in the coming decade.

(I highly recommend that you read the Washington Post article titled “Too Many Men” which examines this problem not only in China, but also in India.)

Implications: China is facing the same growth constraint that Japan faced – a greying population.

Economists break long-run growth trends into two parts: productivity growth and working age population growth. China’s labor force in the 2020’s will not grow as quickly as in the early 2000s. This will slow economic growth and the aging population will increase the need for social programs for the elderly. Unlike Japan, China will probably not achieve developed country levels of prosperity before the one-two punches of population stagnation and aging hit the economy.

This is not to say that China is facing decline or that we should ignore China’s mercantilist trade practices. Instead, we should factor into United States policy that China’s economy is at its economic apex now and that internal challenges caused by demographic changes will constrain China’s economy in the coming decade.

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