Demographic trends tip China growth ideas upside down

PUBLISHED : Tuesday, 23 August, 2005, 12:00am
UPDATED : Tuesday, 23 August, 2005, 12:00am

Companies investing in the mainland on the assumption of 7 per cent per year growth in gross domestic product had better tear up their plans and start over again. Demographic trends indicate the economy is set to grow no faster than an average of 5 per cent a year over the next 10 years.

In Asia, the study of broad population trends and what they mean for the future of business is sadly neglected. This is a shame. Even a cursory glance at the statistics demonstrates that many of our most treasured assumptions about the future of Asia's economies are woefully out of line.

Take China. For years companies have been investing on the mainland on the basis that its GDP will continue to grow at a rate of 7 to 8 per cent a year for the foreseeable future.

According to Clint Laurent, the chief technical officer at specialist research firm Asian Demographics, that assumption is utterly wrong. A combination of improving educational standards and greater affluence - 'the best contraceptives going' - together with the one-child policy means that, far from increasing, China's workforce is set to begin falling over the next few years.

From increasing by an average of nearly eight million a year between 1995 and 2005, the mainland's labour force will actually decline by 11 million workers between 2005 and 2015. Migration from the countryside to the cities will not help either. Many of the mobile young have already moved. Those workers left in the country are largely old and ill-educated.

Worker productivity will improve. But for the GDP to grow 7 per cent a year would require a 7 per cent annual increase in productivity, a rate that that Dr Laurent says is impossible. If productivity continues to increase at the current 4.4 per cent a year, growth must tail off to an average 4.8 per cent a year between now and 2015 (see chart one).

The news is by no means all bad for business, however. 'While total economic growth will slow, individual affluence will go up,' says Dr Laurent. 'Aggregate spending power will increase hugely.'

Some 33 million urban households fall into what Dr Laurent calls the consumption class: those taking home more than 40,000 yuan a year. By 2015, they will number 99 million (see chart two). That increase will mean vast new markets, not only for big-ticket consumer items but also for more specialist services such as tourism, adult education, health care and financial services.

There could be broader effects, too. It will only be five years before China begins outsourcing labour-intensive manufacturing to India, says Dr Laurent.

And if productivity growth at home flags, one way for the authorities to maintain economic well-being could be to massage the yuan higher. 'If China revalues by 12 per cent, the number of households able to buy a car will double,' he says.