Changing demographics at heart of China decline

“The Party has a chance to redeem itself," says Crosby founder Timothy Beardson, but urgent institutional reforms are needed now if the Chinese economy is to avoid a downward spiral.
Today 100 million Chinese are over the age of 65. By 2030 that number will have tripled.
Today 100 million Chinese are over the age of 65. By 2030 that number will have tripled.

Timothy Beardson, founder and director of Crosby, a Hong Kong-based independent investment bank, warns a lack of urgency in tackling institutional reforms by the new Chinese leadership could send the country into a downward spiral.

“No country with a steep, consistently declining population has maintained a sharply rising rate of economic growth,” he said at a luncheon yesterday in Hong Kong.

The country faces a number of demographic challenges that will complicate efforts to address other problems, such as environmental destruction, a creaky education regime and a dysfunctional financial system. “The leadership needs to address these things now while China has the financial resources to do so,” Beardson says.

He worries that the reformist zeal of the 1980s and 1990s, so notably absent under the decade of Hu Jintao’s presidency, is unlikely to resume under Xi Jinping’s rule.

“There needs to be a sense of urgency and a desire for radical reform,Beardson says, noting the political interests that can often lead to inertia. “The pressure is on but I’m concerned [the leadership] doesn’t realize it. The government appears somnolent.”

He breaks China's demographic challenge down into four parts.

Firstly, the birth rate is already so low that the workforce has begun to decline in absolute numbers. This is enabling workers to push up wages, making many manufacturing sectors uncompetitive.

Beardson is sceptical that domestic demand will ever suffice to maintain economic growth, given the lack of progress on welfare and pension programmes. That leaves increased productivity as the only way to maintain GDP growth, which requires innovation -- something, he believes, China has so far got a poor track record in.

Although a handful of industries have demonstrated excellence, such as 3-D printing, genetic studies and supercomputing, most R&D and patent creation in China is an exercise in quantity over quality.

“The commercial environment is dull and grey,” Beardson says. New incentives are required and the existing culture of plagiarism and excessive deference to older scientists needs changing.

The second demographic problem is ageing, as people live longer. Today 100 million Chinese are over the age of 65. By 2030 that number will have tripled. This will create strains on families, given the one-child policy, harming labour mobility and housing prospects. It will also create a fiscal burden that the state is unlikely to want to meet.

Today only 1.5% of the elderly are in institutional care, but Beardson says this figure could rise to 50% over the next two decades: in other words, from 1.5 million people today to 150 million by the 2030s. This will require a massive government outlay, putting pressure on China’s ability to afford other perks of power, including military ones.

The third issue is gender: for a generation now families have given birth to six boys for every five girls. As a result there could be some 50 million Chinese men in 20 years time unable to find domestic wives, potentially leading to social tensions. Urban crime rates are already on the rise, and Beardson suspects that trend will likely to gain speed.

Lastly there is the issue of China's overall population size. Although China’s total population will probably overtake India’s sometime in the 2020s, reaching 1.4 billion, it will then decline quickly, given low replacement rates (ie couples having fewer than two children). So much so that by 2100 China’s population will more like 950 million, Beardson says, citing United Nations estimates, or even just 500 million, based on other independent forecasts -- roughly on a par with the expected population of the United States.

“Scale will become less important, which means advancement will be more dependent on technology and innovation,” he says.

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