Commentary on Political Economy

Saturday, 25 February 2023


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Going by his speeches, President Xi Jinping’s biggest economic focus for China these days is upgrading manufacturing, eliminating reliance on the West for key inputs​ and sowing the seeds of dominance in next-generation technologies.

Addressing demographic challenges sounds a lot less exciting. But that issue is a lot more important if you ask an​ economist. China’s announcement last month that its total population shrank for the first time since 1962 has spurred a fresh wave of analysis on how this will affect the economy and what it means for policymakers.

The country’s working-age population peaked a decade ago, and has since shrunk by 50 million people, Standard Chartered analysts highlight.​ The number of young workers (15 to 24) saw its all-time peak way back in 1987. The decline in the​ ranks of working-age people will accelerate from 2028, averaging 11 million a year to 2050, the bank says.

That’s a lot fewer income-earners to buy goods, and a lot fewer contributors to the public pension system. There are a raft of reforms Beijing can implement to meet the challenge, but they involve taking on vested interests. And that raises political questions in a nation that just saw an unexpected popular protest against Xi’s restrictive Covid policies, and criticism over the lives being lost in his sudden, calamitous retreat.

Xi Jinping. Photographer: Andre Malerba/Bloomberg

This week in the New Economy

Next month’s annual gathering of the National People’s Congress, which plays the part of China’s legislature, could see hints of reform​ that might indicate an effort by Xi to address major structural issues. These range from pension​ policies and fiscal reforms to household-registration rules.

A simple way to slow the decline of the working-age population is to raise the retirement age (from 55 for women and 60 for men).​ Indeed, “expectations are growing that China may soon announce plans to gradually lift the mandatory retirement age to 65 for both men and women,” Standard Chartered economists​ including Wei Li​ wrote in a report this month.

But the recent protests in France illustrate how politically sensitive such a move can be, even for an authoritarian government like China. While public demonstrations are rare, there’s already evidence any proposed reform by Beijing would see plenty of resistance. A brokerage’s report that officials will soon announce plans to hike the retirement age triggered​ widespread​ discontent​ online.

Another fix would be to promote further urbanization, bringing in less-productive workers from rural regions—which still made up 37% of China’s overall population as of 2021, World Bank data show. By comparison, Malaysia and Mexico, which are slightly poorer than China (on a per-capita GDP basis) have notably lower rural populations, at just​ 22% and 19%, respectively.

But further urbanization may be difficult.​ China has long put limits on domestic migration, something that helped Chinese cities avoid the shantytowns of India, Brazil and elsewhere. And a wholesale dismantling of the so-called hukou system—a passport-style regional permit—is unlikely. But reforms to hukou registration, along with initiatives on affordable housing and rural construction, are likely this year, according to​ Zhaopeng Xing, senior China strategist at ANZ Bank.

“Urbanization will hold the key to boost domestic demand,” Xing wrote in a note this week.

But rural migration today affects interests that were hardly present decades ago, and that’s where Xi’s vested interest problem comes in. These days, there are large middle-class urban populations that would be wary about increased stresses​ on school systems, health care and the property market that an influx of hundreds of millions of rural people would impose. As this newsletter discussed recently, at China’s current stage of development, policy choices get a lot tougher.

Boosting productivity in rural areas, including through upgrading education and housing, could help, but that would cost money. And local authorities are running short these days. This is thanks to the property-market bust that wrecked a revenue model dependent on land sales, and the huge cost of maintaining Covid Zero policies for years.

Largely empty residential buildings in the Xiong county of Xiongan, in 2018.​ Photographer: Qilai Shen/Bloomberg

An illustration of local financial strains emerged this week when one​ city with a population of​ 7.7 million drew a lot of attention when it said​ bus services would be halted due to inability to pay salaries.​ Shangqiu, situated in the central Henan province, reported a​ $4.6​ billion deficit on its main budget last year.

Fiscal revenues could be helped mightily by the introduction of a property tax, and broadening the base for income levies. Again, those involve spending serious​ political capital and taking on those pesky vested interests again.

The ability to impose a real-estate tax on unwilling subjects is a demonstration of political power (as 11th century William the Conqueror well understood in ordering the Domesday Book land registry). So for​ all the other illustrations of​ Xi’s​ power, it’s telling that he’s not been able​ to implement​ a​ property tax despite years of trials.

Another reform Beijing is working on is less sensitive: developing private pension programs to help fund retirement costs that will swell as the ranks of the elderly surge. Standard Chartered estimates some 23 million people per year will reach retirement age on average over the 2023-50 period.

China’s population faces rapid aging in coming years, imposing strains on the economy. Photographer: Qilai Shen/Bloomberg

Private pensions could “divert savings away from property and bank deposits into capital markets over time,’ Goldman Sachs economists led by Andrew Tilton wrote in a report this month. That could potentially see a more efficient allocation of capital, boosting productivity and economic growth more broadly—thus helping counter the impact of a shrinking population.

But one downside of this strategy is that there’s no tax on investment income generally. Authorities could introduce​ one, but that would have opponents. Or it could subsidize individual retirement savings—but that would be costly. Tough choices all around.​ 

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