HAN CHINESE RATS ARE DYING - Why don't we hasten the process?
Why has China grown so fast? One very important reason is that it timed its economic opening to the world exceptionally well.
The three decades following China’s 1978 “reform and opening” coincided with a massive surge in China’s working-age population, which peaked at more than one billion in 2013—more than three times the size of the entire U.S. at the time. Connecting that gargantuan pool of youthful strivers to global supply chains not only enabled Chinese factories to undercut other low-value-added manufacturers world-wide but also helped build a deep pool of savings to finance investment. Young workers with rapidly rising incomes, eyeing an uncertain future, saved heavily. That capital was then recycled into more factories and world-class infrastructure, further boosting China’s comparative advantage.
SECOND IN A SERIES
This series asks what may well be the most important economic question of our time. China stands at a crossroads, approaching income levels at which most countries experience a sharp growth slowdown as they can no longer rely on cheap labor. It may struggle to innovate without strong intellectual-property protection and a more efficient way of financing companies. The ball is in Beijing’s court.
China already has about 10 million fewer people between the ages of 15 and 64 than in 2013 and by 2035 it will have about 80 million fewer, according to United Nations’ projections. China’s sky-high savings rate also has been falling since 2010—the same year that working-age citizens peaked as a percentage of the total population. Factors other than demographics also are at play: Export growth has weakened since the financial crisis, weighing on corporate savings. But savings growth will likely slow further. To maintain high economic growth, China will need to import a lot more capital from the rest of the world, or use its own capital much more efficiently, or both. All of this is happening a lot faster than many appreciate.
China isn’t the only one with a demographic problem. The number of babies born in the U.S. fell to a 32-year low in 2018. What is striking about China, though, is how well the country’s bulging working-age population lined up with the period of its fastest growth and how well slowing growth since 2013 has lined up with its decline.
Partly through luck, and partly through good economic decision-making by then paramount leader Deng Xiaoping and his allies, China opened to the world just as its demographic advantage was approaching its apex—not just in comparison to the U.S., but also other developing countries. From 1990 to 2010, China’s working-age populace rose from an already-high 67% of the total population to nearly 75%. The U.S. figure never moved above 67%. All other low-income countries in aggregate maxed out about 62% in that period, according to the U.N.
On current demographic trends, however, all of this will reverse by the late 2030s. China will be older than other developing countries and nearly as old as the U.S. China’s rural citizens are already much older on average than city-dwellers. Increasingly, China won’t be able to boost productivity by moving workers from low-value agricultural jobs into high-value manufacturing as it has for decades. And lower savings growth will make state-driven investment surges increasingly untenable. Beijing scrapped China’s decadeslong one-child policy in 2016, but the expected surge of births has failed to materialize.
The nation therefore has a limited window to leverage those big savings to create the next generation of global technological and business champions—before it needs to start supporting legions of elderly with a rapidly shrinking, expensive workforce. From this perspective, China’s inefficient, state-dominated financial system, which continually squanders huge amounts of those savings channeling them to bloated state-owned companies, looks like a potentially fatal problem unless rapidly corrected.
China’s leadership certainly recognizes that time is limited. Beijing’s state-led innovation programs have a mixed record, though, and are now provoking strong pushback from the U.S.
A better way to ensure success might be to free up the enormous financial resources tied up supporting lumbering state-owned behemoths. The entrepreneurial, ambitious Chinese people can do a far better job with them.