China’s Aging Demographics
Consider the following series of Tweets by Michael Pettis at China Financial Markets.
- China had great demographics between the 1970s and until about a few years ago, when the working share of the population surged from the mid-50s (below the global average) to the low 70s (well above the global average).
- Now that the working share of the population is set to decline quite rapidly, mainly because of a surge in retirees, this should put upward pressure on household savings, in which case the extent of implicit and explicit income transfers to ordinary households needed to…
- rebalance demand towards consumption must be even greater. Because these transfers must ultimately be funded by liquidating government assets, in the end they cannot help but represent a significant shift in the distribution of political power.
Demographics and Redistribution Question
Pettis Reply
- The extent and direction of the transfers are different, Mish, so I’d argue that the political implications are likely to be different, but one way or another we should expect political changes. You can’t shift income without affecting the distribution of power.
- The needed income transfers in the US and Europe are much lower than in China, and they mostly should involve transfers from the very rich to workers and the middle classes, rather than from government to households, as in China.
- I think Japan is somewhere in the middle, and my understanding is that it is the elderly in Japan who retain a disproportionate share of income and who would ultimately have to absorb the costs of rebalancing income.
Tweet Threads
Population of China Has Peaked
This chain of Tweets and replies started with the South China Morning Post article China Facing Economic Crisis as Population Peak Nears
- Consumption set to slump after population tops out in 2025, says Cai Fang, a member of the central bank’s monetary policy committee
- Beijing must ‘increase labour participation and social security benefits’ for the elderly to shore up consumer demand, he says
- If people of working age were faced with the additional financial burden of looking after an elderly relative while trying to raise a family it would make them more likely to save than consume.
Andrew Batson, director of China research at consultancy firm Gavekal made this comment: “The government is not preparing to raise revenue to finance a major expansion of the welfare state.”
What Will China Do?
If China sells assets to fund retirees, the immediate question is “what assets?”
State owned enterprises of questionable value because they need continual government support.
US treasuries perhaps? If not what? Or does China put things off until there is political upheaval?
I do not know what China will or won’t do. But the repercussions of China’s actions could profound.
Mish
China will resolve this dilemma the same way that the US, Canada, Japan, and Europe will do so: PRINT MONEY UNTIL THE COWS COME HOME (aka Inflation comes roaring back).
China will resolve this dilemma the same way that the US, Canada, Japan, and Europe will do so: PRINT MONEY UNTIL THE COWS COME HOME (aka Inflation comes roaring back).
One option for China would be to build up its offensive military then seize other nations i.e. Taiwan, S. Korea, Singapore, or Malaysia etc and sell off their assets . Of course they could at the same time sell off U.S bonds to enhance their cash flow and consumption.
Competition Heats Up in the Melting Arctic, and the US Isn’t Prepared to Counter Russia link to theconversation.com
Let’s see if I floow this—GHG emssions are up increasing arctic melting so we need to increase our icebreaker fleet to allow LNG tankers to traverse the Arctic to increase GHG emissions and increase arctic melting.
OK??
Social security is a form of wealth transfer or redistribution of wealth. I assume you’re against
I do not like how it is structured – I fail to see how it can be fixed
I’ like to see a 401k solution be adopted but I worry that private business would prey upon the poorest and least financially savvy in our society. Seeing that in the PACE program. Seem gov’t programs just invite abuse from the outside
Since housing is in short supply they should develop housing and sell it at a small profit to those that need it.
The biggest issue is that societies and governments everywhere need to find ways to kick the habit of dependence on population growth to maintain an economy. When I was in college in the 1970’s I took a class with a textbook entitled “Towards a Steady State Economy” which was inspired as a solution to the economic problems described in “The Population Bomb”, a popular book in the ’60s.
Professor Pettis’ assumption, “You can’t shift income without affecting the distribution of power” runs counter to the CPC’s raison d’être: it’s there to shift income while retaining power. So far, it has done a good job of it.
Home ownership is much higher in the lower half of Chinese income earners than the upper half; median household net worth is much higher than average household net worth; real wages are rising faster in historically poorer regions than rich ones. And Beijing has committed–very publicly–to bringing China’s Gini coefficient down from its current 38% close to Finland’s enviable 28% by 2035-2049, surely the greatest income shift in world history.
Professor Pettis confident assumption, “You can’t shift income without affecting the distribution of power” runs counter to the CPC’s raison d’être: it’s there to shift income while retaining power. So far, it has done a good job of it.
Home ownership is much higher in the lower half of Chinese income earners than the upper half; median household net worth is much higher than average household net worth; real wages are rising faster in historically poorer regions than rich ones. And Beijing has committed–very publicly–to bringing China’s Gini coefficient down from its current 38% close to Finland’s enviable 28% by 2035-2049, surely the greatest income shift in world history.
Mish, the information presented here is so on point and helpful for a novice economist such as myself. Mr. Pettis’s tweets through the years are so enlightening. Thank you for making the transition to your new host seamless.
Thanks
I passed that on to Michael
China could rebalance by selling off SOP’s to consumers too
State owned enterprises. Sorry
SOPs
Brought to You by the Committee to Save the Apostrophe from Abuse
Anytime you suppress the rate of interest those with savings might obtain in the marketplace you’re engaged in a transfer of wealth. In the case of China to SOP’s in the U.S. to banks and those with primary access to capital
Meant to say state owned enterprises
So…currently the mandatory retirement age in China is 60 for men and 50 for female workers and 55 for female civil servants. Pretty young, by US standards.
My understanding is that the PRC plan for the retirement age to go up slowly over the next several years. This is necessary, because the shortfall for their pension outlay is estimated by some to be as much as 11 trillion USD over the next 20 years.
At the current retirement age, nearly forty percent of Chinese will be collecting retirement with 15 years or so.
No way consumption doesn’t go way down, unless there are fairly radical changes.
Contrast that to the US, where nobody HAS to retire, and people now commonly work past age 65. Social Security bennies don’t max out unless you work until 70.
Zacly. And…Chinese productivity has been doubling every 8-10 years for decades and is on track to do so again by 2030…
“Although its productivity growth averaged 15.5% from 1995 to 2013, when its working-age population reached its peak, productivity growth slowed to an average of just 5.7% from 2014 to 2018. In other words, China’s productivity growth rate is decelerating just when it needs to speed up.”
Yeah, China. Amazing.Zacly.
The population may peak, but the consumption doesn’t necessarily have to peak.
Compare the consumption per capita of the US vs China.
A more broadly wealthy China means growing consumption. I would guess that the older demographic in China has much more conservative spending pattern than younger Chinese.
This is the international trend–profligate youth.