Age Wave to Come Crashing Soon Over China’s Economy 

By Alan Wheatley, Reuters

April 27, 2009

China

As if Chinese policymakers did not have enough on their plate, they will soon have to grapple with the unprecedented challenge of a country that is growing old before it gets rich.

Many countries are turning grey, but Western experts are worried that Beijing is unprepared for the sheer speed at which the world's third-largest economy will age: on UN projections, China's working-age population will peak in 2015 and plunge by 23 percent by 2050.

By then, there will be 438 million Chinese aged 60 or over, or 61 for every 100 adults of working age, up from just 16 in 2005.

A report released last week by the Center for Strategic and International Studies says the economic and social stakes are so high that China's leaders, though in the midst of a financial crisis, cannot afford to delay needed policy changes.

"How China navigates its coming demographic transformation will go a long way toward determining whether it achieves its aspiration of becoming a prosperous and stable developed country with an expanding role in the global economic and political order," the study by the Washington think-tank says.

Its core concern is China's rudimentary pension system, which is characterized by vast unfunded liabilities, empty accounts and low coverage.

As the CSIS report notes, today's developed nations were all affluent welfare states by the time they aged. By contrast, China is still a poor country that has not had the time to accumulate the wealth needed to pay for comprehensive retirement protection.

Just 31 percent of the Chinese workforce, mainly in the state sector, now receive a public pension. Most of the fast-growing private sector is excluded, as is the vast population of migrant workers. As for rural China, pensions are virtually non-existent.

So hundreds of millions of elderly citizens will have to fall back on their shrinking families at the very time when the boost to growth and incomes from the demographic dividend of an expanding labor force goes into reverse.

In the 30 years since China embarked on economic reforms, the growth of its labor force has added 1.8 percentage points a year to gross domestic product growth.

By the 2030s, in contrast, the shrinkage of its working-age population will be lopping 0.7 points a year off growth, according to CSIS's projections.

Many protests in China are already sparked by unpaid pensions, and the CSIS said that without an effective retirement policy, the social stability that is one of the pillars of the government's legitimacy could eventually be undermined.

"Not just a retirement crisis, but also a more general social and economic crisis may loom in China's future," the report said.

RACE AGAINST TIME

More broadly, rapid aging will threaten China's hegemony in low-end manufacturing by pushing up labor costs, economists say.

As Vietnam's demographic turning point will not come until 2025 and India's working-age population will not peak until 2040, both should enjoy a growing cost advantage over China in labor-intensive sectors.

The ruling Communist Party is aware of the looming challenges and is guiding pensions policy in the right direction.

Reforms have strengthened the basic pension system; enterprise annuities -- similar to America's 401(k) defined-contribution plans -- are growing fast; a basic rural pension is due to be in place by 2020; and the National Social Security Fund, set up in 2000 to backstop underfunded provincial pension schemes, now has assets of about $80 billion.

But Stuart Leckie, chairman of Stirling Finance, a Hong Kong pensions consultancy, said the issues need to rise to the very top of Beijing's political agenda.

"China really is in a race against time. It is doing the right thing overall, but it needs to do them faster and it needs to do them better," Leckie said.

Compounding the policy challenge is another striking feature of China's demographic profile -- a chronically imbalanced sex ratio that ensures males will swamp females for years to come.

A new study in the British Medical Journal (BMJ) found that there were more than 32.7 million males than females under the age of 20 in China, because the spread of cheap ultrasound tests and easy abortions has reinforced the age-old preference for boys that is common across Asia.

Countries typically record between 103 and 107 male births for every 100 females. But in Chinese towns in 2005, there were 124 boys aged one to four for every 100 girls.

The figure rose to 126 in rural China and topped 140 in Henan and Jiangxi provinces, according to the BMJ.

The potential repercussions of this imbalance, accentuated by China's one-child policy, are grave.

"What we know from other societies that have been male-dominated is that they either emigrate or they fight," Leckie said.

Yet in China the number of excess males is too great for the problem to be solved by emigration, Leckie added. "So this is undoubtedly going to be a real social issue."

NO COUNTRY FOR YOUNG MEN

Economically, the impact is already being felt.

China International Capital Corp (CICC), an investment bank, says its studies show that provinces with a big imbalance consume less. This is because the competition for brides in rural China forces the parents of young males to help them buy houses early and to save up for betrothal gifts.

The root cause of this behavior is that parents, in the absence of a strong welfare safety net, look to sons to take care of them in their old age.

"Unless China sets up a much-improved rural social security network and medical care insurance system, we believe the rural sex ratio imbalance may deteriorate and continue to constrain rural consumption," CICC's economists said in a recent report.

CSIS said that even more worrisome than the shortage of brides today will be the shortage of daughters-in-law tomorrow; for while the son is responsible for looking after his aging parents, it is his wife who actually provides the care.

All the more reason, the think-tank concludes, for China to build a floor of old-age income support, financed out of general tax revenues, and to create a national, fully portable system of funded retirement accounts.

"A young China with a predominantly rural economy and strong extended families could get by with a retirement system that leaves large gaps in coverage. A rapidly developing and rapidly aging China with weakening families cannot," CSIS said.

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