China Comment

Energy, Environment, and Economy

China’s Aging

The Dallas Morning News, the AP, and other news outlets often warn China’s aging will put significant breaks on its future economic development. I disagree.

Although China has some challenges to address regarding its aging population, aging alone will not be a significant drag on China’s GDP growth rate. Here, I examine some common fears about China’s aging populace, then I rebut the dire predictions.

Elder Population Explosion

Warnings about China’s aging population often start with the China National Committee on Aging’s claim that “[b]y 2020, China will have 400 million people age 60 and older, and 100 million older than 80. By 2050, a third of the 1.4 billion Chinese will be at least 60.”

This is a lot of elderly, and some commentators believe China may grow old before it grows rich. But a population of 400 million elderly still leaves nearly 900 million younger folk ready to work and contribute to increased productivity.

When the support ratio of young to the elderly dwindles from 5-1 to 3-1 or 2-1 that could feasibly cripple sustained economic growth in most economies. However, China is not a typical developed country that has fully exploited the human capital of its workers– China’s workforce is still developing.

Productivity and Economic Potential

Beijing is pushing energy efficiency, development of rural regions, and policies that will help move millions of Chinese out of the rural sector and into the urban. Amazingly, some “98 million to 128 million Chinese agricultural workers are surplus.” In “A Weak China?” I discussed how 30-45% of China’s population is still rural, whereas South Korea and the United States have less than 7%!

Economic growth comes when productivity, education, infrastructure, and efficiency are present. Even though China has been underdeveloped in all those sectors, it has posted remarkable 10%+ GDP growth for years. Ultimately, China still has a long way to grow.

Caring for the Elderly

China’s economic growth could slow if society is required to care for the elderly through imposition of social programs. However, unlike in the West, Beijing simply has not made the same massive social welfare program commitments. Although Beijing recently made some commitments, the Party’s pocketbook does not grant the same level of government-sponsored elder-care expected by Westerners. Instead, “66 percent of interviewed rural residents said they would rely on their children when they were old” (People’s Daily).

The lack of government obligations allows China to invest in infrastructure, energy development, and other productive, GDP-growing enterprises.

Because Chinese people know they must depend on themselves and not the government for elder care, they have traditionally saved a great deal of cash that could otherwise have been used to promote even faster Chinese GDP growth.

The Dallas Morning News, citing Cai Fang, “director of the Institute of Population and Labor Economics with the Chinese Academy of Social Sciences,” attempts to indicate that 1/4th of China’s economic growth came “from the productivity of a workforce with few dependents younger than 15 or older than 65… [and that] In “five years, that advantage will start disappearing, and a rising number of the elderly will slow down China’s economic growth,” according to Dr. Cai.

Although there may have been “few dependents” during China’s growth period, China’s savings rate has been one of the world’s highest, “totaling nearly 40% of the gross domestic product” as of 2004 (as noted by the McKinsey Quarterly). This could be because the Chinese traditionally plan ahead to their own elderly futures, expecting to use their own money instead of government subsidies.

The Chinese already have a good deal of cash saved, therefore it is odd to assume that those expecting to become elderly will divert significant additional money from the economy to retirement savings accounts. Individual Chinese are, in general, already prepared for financial disaster.

Demands of elder-care seem unlikely to directly affect Chinese consumer spending any more than their current 40% savings rate already has allegedly “depressed” consumer spending.

Health

Alarmist stories about China’s aging problems often cite how China’s elderly are compelled to work longer to ensure they will have enough money available for when they retire. This, however, seems to be an argument for continued Chinese growth rather than economic contraction. Assuming the elderly remain relatively healthy, they will have a longer time to contribute to China’s GDP.

The elderly’s health may be in question, given China’s environmental record, but there has been progress in China’s health care system and its confrontation of environmental problems.

Where There Will Be Problems

Admittedly, Chinese aging will create some problems. Those problems are, however, addressable.

* Rural Rust Belts. In Japan, which currently has nearly 21% of its population aged 65+, rural cities have been hollowed out. Aging will press hard against rural areas which may need to attract polluting industries in order to gain money that can be used to subsidize elderly populations. The young have moved to the coasts where economic opportunities exist. However, the young may return. The future of China appears to be in development of its internal market. It seems likely that for various reasons, the center of the country will experience significant investment growth from 2011-onwards. (A future article will examine this theory.)

* Older people will be alone, without anyone to support them, or to give comfort. This could lead to psychological problems, crime problems of people preying on the elderly, public health hazard problems, and stability problems (the banned F-G belief system was remarkably popular among the elderly.)

* Health concerns. It can be quite costly to pay for elder care and if the Chinese society ages poorly and develops chronic conditions that are expensive to treat, even the massive amounts they saved may not be enough to ensure fiscal security.

* Rising expectations for public health care could tie down government investment in productivity-creating enterprises. Although on average “retired Chinese [currently] get government help of little more than $50 a month,” there are demands for more government assistance.

According to the Dallas Morning News article, “[some] polls [they do not cite which polls or who conducted them] show 87 percent of Chinese now expect the government to take care of retirement income and health care… A startling share of Chinese now believe the primary responsibility for caring for the elderly should be with society as a whole – the state… And if the state fails to deliver on that expectation, it could be a real social and political crisis.”

Conclusion

China is aging and with age will come new challenges. However, China is well-situated to confront its challenges. Although the net size of China’s workforce will decline, the net productive urban manufacturing core will remain steady as over 120 million rural agricultural workers transition to other industries. China can improve its infrastructure, logistics supply chains and, energy efficiency. Even improvement to US-levels will result in millions worth of savings that will directly transition toward GDP growth.

In China, wisdom (infrastructure improvement, energy efficiency growth) certainly will accompany age.

Last Notes

* On Energy Efficiency: “In 2005, China’s energy consumption per unit of GDP was… more than three times the level of the United States, more than five times that of Germany and eight times that of Japan” (Xinhua); specifically, “the energy intensity of China in 2005… was 35,766 British thermal units per U.S. dollar. In the U.S., the Btu/dollar ratio was 9,113. In the U.K. and Japan, the figures were even lower, 6,145 and 4,519 respectively” (Forbes).

* In General: I realize there are almost limitless factors to consider regarding the future of China’s aging, so if you would like to discuss China’s aging, feel free to communicate in the Comments section.

13 October, 2008 Posted by | China Environment/Health, China Future | , , , , | Leave a comment

A Weak China?

In the Washington Post, John Pomfret, former WP Beijing Bureau Chief and author of Chinese Lessons: Five Classmates and the Story of New China (2006), argues that China is not going to become a superpower. His argument is a bit misleading, however. He demonstrates that China faces challenges, but he admits China’s GDP will outpace the United States’ in size. 

Pomfret’s four challenges, while intriguing, appear to be the wrong challenges to address. Despite them, China will still become a superpower. In this article, I explain why his challenges are not the most apt. Then I suggest four different challenges to China’s growth.

Pomfret calls attention to four challenges; “dire demographics, an overrated economy, an environment under siege and an ideology that doesn’t travel well.”

Dire Demographics… But Room for Expansion

Pomfret successfully argues “that as the working-age population shrinks, labor costs will rise.” In China’s coastal provinces, labor costs have already risen, partially due to reduced migrant labor flows. It is also true that after 2013, China’s labor force will peak at 900 million and subsequently the elderly will be more numerous than adolescents and children. And there are nearly 119 males born for every 100 females, which will create tensions.  

But, it is also true that despite decades of posting productivity gains, China is still underutilizing its human capital. Its workers have not yet realized the full potential of productivity gains that workers in other countries have realized- which means that China still has a vast, untapped potential for growth.

Chinese labor productivity has grown from (in 1995 RMB values) around 5000RMB per worker in 1979 to 21,500 RMB per worker in 2005 (or roughly $3100). (Holz, 166 and He & Kuijs, 6) And productivity grew at around 8.7% per year from 2000-2006. (The OECD defines Labor Productivity as GDP per hour worked) The US Labor Productivity value-added per worker is currently ranked sixth in the world by the OECD, behind Luxemborg, Norway, the Netherlands, Ireland, and Belgium.) 

Japan and South Korea, which similar to China started at a low base for productivity, are currently at 71% and 41% of US productivity ratings. Regrettably, it appears these OECD numbers have not been adjusted for PPP (Purchasing Power Parity). However, the point remains, South Korea had low productivity and a majority of citizens employed in agriculture back in the 1960s. Now, only 7.5% of its population works in agriculture.

China still has up to 43% of its population employed in agriculture (due to the nearly 200 million migrant workers who retain rural residencies, the number is probably more like 30%, but that is still an overly-high number). This underutilization and underemployment of workers demonstrates China still has much room to grow, and many more productivity gains to realize– its rise is not yet finished.

Overrated Economy… But Massive Purchasing Power

Pomfret rightfully criticises Keidel at the Carnegie Foundation for a July 2008 extremely pro-China growth article. Keidel assumes China will maintain over 7% yearly growth rates through 2030. These estimates may prove to be overly optimistic. However, China’s economy is still deregulating and expanding. It may not grow as fast as Keidel assumes, but barring massive inflation and energy shortages, the sheer amount of human capital and potential for development will allow it to expand at a healthy clip.

Pomfret wanders a bit into strange territory when he argues China cannot become a superpower simply because GDP per capita is so low. But why does low per capita GDP preclude development of a strong country? If GDP is high enough, China can finance a modern military, and its state-owned businesses can purchase overseas energy and mineral resources.

With even modest GDP growth, the domestic market can serve a middle class of perhaps 400 million (or 100 million, depending on the estimate), which is larger than almost all Western countries’ populations! If China is a giant in terms of worldwide trade, it can have greater influence in trade contracts with countries like Brazil and the Central Asian nations, marginalizing the United States.

Note: In later articles I hope to explore China’s middle class, its productivity in detail, and how China’s aging might effect domestic policies. I would love to go into greater detail on these items here, but then this post might become thesis-length. 

Environmental Problems… A Legitimate Challenge; But It Can Be Overcome

Pomfret is correct that China faces environmental problems. Elizabeth Economy and other scholars have detailed this in numerous books and articles. And environmental pressures can cause societies to implode, as Jared Diamond famously argued in Collapse.

However, China may be able to make fighting its pollution an opportunity for societal and technological development. China could allow NGOs and private groups greater chances to challenge local development and expose corrupt practices. Or, China could continue to suppress cross-provincial border NGOs, and could fail to develop technological innovation. The future of China and its environment could be dire, as Pomfret believes, or it could be positive should Chinese invent innovative environmental solutions (See Prospects for China’s NGOs for more info on Chinese NGOs).

Bankrupt Ideology… But The Country Is Just Now Developing Its “Mission” (See Maslow’s Hierarchy)

Pomfret’s argument about China’s ideological intellectual bankruptcy is interesting. He makes a good point about how China’s one-party system can stifle innovative thoughts. But China is still developing its mission, and there may come a time when China’s ideology can be successfully exported. (Please see the last section of my article on Maslow’s Hierarchy).

In contrast to the United States’ private think tank minds, and European NGO leaders, China has yet to produce many world-respected political theorists to propogate its philosophy. Its famous discursive-thinking thinkers and personalities; Wu Jinglian (economist), Bao Tong (politician), and Gao Xingjian (author) are either retired, marginalized, or living in exile.

(Note: This is not to say China lacks independent thinkers; CASS (The Chinese Academy of Social Sciences) has been known for producing innovative thought. And University scholars such as Shi Yinhong have done innovative work in regards to foreign policy. But in one example of stifling creativity, the State closed the innovative Journal “Strategy and Management” when they felt its authors strayed too far from the party line; Other thinkers contribute valuable intra-China thoughts on nationalism and how China should relate to the rest of the world, but Chinese views on how the world should be ordered internationally are less often elucidated, and have less of a world-wide impact. China has also long taken a non-voting and non-leadership position on the UN Security Council.)

Conclusion

Pomfret is right, China faces challenges. But these challenges are not dire enough to hobble its rise to global superpower status. Only the environmental challenge appears to be a potentially growth-derailing problem, and it could yet be overcome.

In response to Pomfret’s proposal, I suggest a few different problems China is facing that may delay its rise. To succeed as a superpower, China most needs to ensure energy supplies, tame inflation, deal with dissent/protests/petitioning by instituting a rule of law, and provide social services. (If the last two items are combined, then I would list Pomfret’s “environmental” challenge).

I hope to explore these problems in a future article and would like to hear your opinions on what four problems you believe are most important for China to overcome.

(My further response, based on your feedback, is here).

30 July, 2008 Posted by | China Economy, China Future | , , , , , , , | 11 Comments

Who’s #1?

Reality check here. China’s economic power is great, and getting greater every day, but it is important to note where China stands in relation to the world.

ECONOMICS, EXPORTS, AND IMPORTS

Despite being hot on the heels of Germany in striving to become the world’s third largest economy, and despite surpassing the US in April 2008 as the world’s second largest exporter, China still trails the United States in global economic heft.

People may now buy more Chinese products than those made in America; but there is an argument that much of China’s rise in exports is due to its new position as a final assembly-point for goods made elsewhere in Southeast Asia and the world. “These patterns are reflected in the Morgan Stanley estimate that 60% of the US trade deficit with China is due to imports from subsidiaries of US firms,” according to the EU’s European Commission.

 And although people don’t buy as much “American” as previously, Americans still buy much of the world; purchasing $2 trillion in imports, compared to China+Hong Kong’s $1.2 trillion.  Contracts and contacts with foreign countries can restrain their actions and influence their internal policies.

THE BUSINESS OF BUSINESS

Where United States companies go, and where its IMF and World Bank head, countries shake.  WalMart’s GDP in 2006 was larger than that of 144 of the world’s 170+ countries’ GDPs. 

China lacks an indigenous globally recognized top brand (See BusinessWeek/Interbrand’s 2007 survey); the US has 7 of the top 10. (A discussion of the top 20 Chinese brands such as Haier, and Lenovo is HERE). (IBM discusses the problem HERE on page 7.)

UNITED NATIONS

The US still accounts for the greatest percentage of UN funding (22% to China’s 2%, Russia’s 1%, and Germany’s 8% as of 2006. Only Japan’s 20% comes close to the US’ level of contribution.) Without US funds going in, the UN would largely be inoperable.

GDP

Additionally, the US had a 2007 GDP of over $13.7 trillion; China possessed a GDP of $3.249 trillion; The US stock of foreign FDI investments in 2006 was worth$2.3 trillion in 2006; China’s net worth of foreign FDI investment stock was $93.75 billion in 2007. France and the UK both realized values of over $1 trillion. China ranked 23rd on the CIA/WorldFactbook list list, behind Brazil. Even with Hong Kong factored in to China’s total, however, (since many Chinese businesses mainly do business with the outside world through Hong Kong; the total equals 534 billion, placing Chinese stock of foreign FDI investments in 8th place behind Germany, Switzerland and the Netherlands and just ahead of Spain.) It should be noted, however, some of Hong Kong and China’s listed FDI is an overlap, since despite the countries being unified; Hong Kong investments in China are counted as FDI investments.

Of course, if China keeps developing at the fast economic clip it has set, over 10% year-on-year for the past 10 years, and at over 9% through 2009 according to the OECD, the country could come to pass the United States in GDP size around 2035.

AGING CHALLENGES

However, it should be remembered that China is aging fast. By 2020, China’s population aged over 60 will be 16.7% (equal to that of the US’ elderly population in 2000); up from 10.1% in 2000 (AARP Bulletin, June 2008, 24). The US’ proportion will have grown to 22.8% by that time- on par with Japan’s proportion as of 2000.  China’s One Child Policy, instituted in 1979, will begin to be harshly felt after around 2016- the date where the number of over-65 persons exceeds the number of under-18-year olds.

Worries about who will take care of the grandparents will put stress on China’s social welfare system to provide increasingly greater proportions of their GDP, similar to, and perhaps worse than America’s current social security and medicare crises. [A later article will examine China’s aging in detail.]

RURAL-URBAN ECONOMIC PLATEAU

China is growing fast, but with growth can come hiccups as an economy reaches a plateau. Once a majority of rural farmers have moved to the cities, as happened after over 25 years of growth in Korea and Japan, the productivity increases begin to decline. In China, the rural population is still 56%; compared to Japan’s 21%, Korea’s 19% and the United States’ 23%. (see page 61 of this UN report on Urbanization). Once China’s rural population drops to a 30%, then all the easy growth will be gone.

China’s economic weight in the world can be overstated, but it has natural limits to its growth, limits that were reached by the Asian Tiger economies in the 1990s. Remember, everyone thought Japan was going to “own America” in the 1990s; but bad investments, bank failures, a sluggish economy, and the American Internet-tech revolution combined to flummox Japan and help hoist America back into its position as the world’s economic leader.

CONCLUSIONS

America may not always hold the lofty position of the world’s #1 economy, but for the short term its government, its FDI, its companies, and its instruments- the World Bank and the IMF continue to matter more to the world.

10 June, 2008 Posted by | China Business, China Economy, China Future | , , , , , , , | Leave a comment