Which way for China's bid to join rich nations as demographic time bomb ticks?

Beijing is faced by a demographic time bomb as it seeks to join the club of rich nations before its population peaks in about 15 to 20 years' time

PUBLISHED : Thursday, 29 August, 2013, 12:00am
UPDATED : Thursday, 29 August, 2013, 8:44am

Does China want to join the club of rich nations again after a 200-year interval during which it has been kicked around and bullied by Britain, France, the US and Japan - or will it settle for another few hundred years of being a middle-ranking middle-income country that can bully the smaller countries around the China seas?

That may sound tough but it is the tough choice facing President Xi Jinping and his colleagues once they have settled the Bo Xilai affair.

As an internationally respected economist with Chinese heritage put it to me: "China has a 15 to 20-year window of opportunity, which is the time between now and when the population peaks. Its leaders have to decide what is most important to them. For me, they should sacrifice everything for the 200-year-old dream of joining the rich world."

The leaders may say that they want both to be an economic megapower and a military superpower, though, professing to be a peace-loving people, they would probably deny that they want to exercise the kind of dominance that the US does today and which the Soviet Union aspired to.

But in spite of its glorious economic success in pulling itself up from poverty to become the world's second biggest economy in the mere 45 years since Deng Xiaoping opened the doors to the rest of the world, the economic tide is now beginning to turn against China.

Its population will peak in about 15 years' time and it has already started to turn grey. At the same time, China urgently needs to restructure its economy. This is a complicated process. It needs to rebalance away from the investment binge and towards consumption.

This is the first chance in 200 years China has a chance to achieve developed country status

But it must also urgently upgrade its industry so that it does not get caught in the infamous middle-income trap, making goods that are at risk from competition from goods from lower wage countries such as Bangladesh and Myanmar.

China has already passed the "Lewis turning point": there are no more surplus workers to come in from the countryside, meaning that there is no cheap way to grow. China has to dedicate itself to upgrading its industry.

There were two small warning signs in official Chinese reports last week. The ministry of education announced that in 2012 more than 13,600 primary schools closed nationwide. Between 2011 and last year, the number of students enrolled in primary and secondary schools fell from nearly 150 million to 145 million. It also added that between 2002 and 2012, the number of pupils in primary schools fell 20 percent.

This is the impact of the "one child" policy - forcing parents to have just one child - beginning to bite. But this slowing population is only half of the pincer movement squeezing China.

The other pincer is that the population is beginning to age. People's Daily warned the day before the announcement of falling school populations that China was facing an impending social security crisis as the number of elderly people was expected to rise from 194 million last year to 300 million by 2025.

As Richard Koo of Nomura Research Institute noted: "Demographics will cease to be a positive for China's economic growth and start to have a negative impact."

From 2016, the demographic problems will really start to bite as a decline begins in China's working-age population, resulting in a rise in the age dependency ratio.

In a careful analysis of the ageing population, the US research consultancy Stratfor says that the Chinese leadership is aware of the problem and its implications but that all the potential solutions come with their own problems attached.

Stratfor notes that the Chinese Communist Party "continues to flirt with relaxing the one-child policy in an effort to boost fertility rates, most recently with a potential pilot programme in Shanghai that would allow only-child couples to have another child. On the other hand, the government has proposed raising the national retirement age from 55 to 60 for women and from 60 to 65 for men."

But Stratfor argues that raising the retirement age will only delay the inevitable, and could meet resistance. "It will meet stiff opposition from an important constituency of professionals, including many civil servants," the report predicts.

What will China do? The respected economist points out:

"If a country is run by a dictator, he would typically use foreign enemies to distract the people from domestic affairs. China should do the opposite and declare that this is the first chance in 200 years that China has a chance to achieve developed-country status.

"This is what the Chinese nation has been waiting for, having been screwed up by the British, the French, the Japanese, and their own massive blunders like the Great Leap Forward, the Cultural Revolution."