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China Needs More than Change in One-Child Policy

John Lee

China’s decision to abandon its “one-child” policy, announced Oct. 29 on the final day of the Chinese Communist Party Central Committee’s Fifth Plenum, suggests that China’s leaders are finally facing up to the unintended and serious problems this law has created for the country. Although no timeframe was given for actual implementation of the change, the decision highlights the country’s struggles with its shrinking workforce and rapidly aging demographic profile.

Abandoning the policy – characterized by forced sterilizations and abortions along with exorbitant financial penalties for citizens who broke the rule – has been widely lauded. And rightly so. China’s problem over the next few decades will be too few, rather than too many, young people – the opposite problem from the time when the “one child” policy came into being. But even though the change to allow up to two children is a step in the right direction for China, it will still be much too little too late.

Although other large countries, such as Japan, Korea and much of Western Europe are entering the “grey” zone, they are in a better position to cope with an aging population. Based on economic projections for 2020, China’s gross domestic product per capita will be less than a third of Japan’s during the same stage in the demographic cycle, even generously assuming a 7% annual growth rate for China.

Bluntly put, China is growing old before it can grow rich, and adopting a two-child policy is far short of a game changer. The one enduring legacy of the Communist Party’s model of “capitalism with Chinese characteristics” is that it is leaving the country woefully underprepared in dealing with what was an entirely foreseeable phenomenon.

Inevitable trend

To give the party some modicum of credit, it used its Fifth Plenum to acknowledge the problem. When China launched its reforms in 1979, the same year as the one-child policy was introduced, there were around seven working persons for every retiree. The current ratio is about five for every retiree. But this year represented a significant turning point, because it marks the start of an inevitable trend of more people leaving the workforce than entering it.

By 2035, there will be 2.5 working persons for every retiree in China, which means that 40% of the population will be of retirement age then – as opposed to less than 20% now. Despite periodic increases in the CCP’s already optimistic birth rate growth targets, it will be extremely difficult — if not impossible — to reverse the aging trends in any significant way.

China’s aging population is largely the result of a dramatic increase in average lifespan, which rose from under 65 years old in 1980 to over 75 years today. While the government can force women to limit themselves to one child, it is another thing to convince them to have more children. Wealthy cities such as Shanghai (reporting a fertility rate of only 0.6, which is probably the lowest of any major global city) provide evidence that the emerging Chinese middle class, like their Western counterparts, are choosing lifestyle and career opportunities over larger families. This does not even take into account the widespread Chinese preference for sons over daughters, which has resulted in an estimated surplus of some 40 million Chinese men of marriageable age by 2020.

If the graying of China is inevitable, what are the prospects that the country can at least age “gracefully,” in terms of enabling the elderly to enjoy a decent living standard when they retire and receive the healthcare and other services they require? This is where the culpability of the government’s model of “capitalism with Chinese characteristics” comes in.

The country’s policies since the mid-1990s have been widely praised for achieving rapid growth rates. Growing national wealth is the prerequisite for a better life in any developing country. However, a much bigger economy will not cushion the impact of a fast-aging demographic for China, for a number of reasons.

The curse of SOEs

First, inefficient state-owned enterprises still dominate all industrial segments of the economy outside of export manufacturing. These sprawling companies survive thanks to cheap capital, massive subsidies, favorable tax policies and regulatory protection. The result is that over half of all domestic financial savings are allocated to the SOEs.

In contrast, China’s household income as a proportion of GDP has declined from about 50% in 2000 to just above 40% today, while private domestic consumption as a proportion of GDP has declined from just under 50% to just over 30% over the same period. This is all evidence that the state-affiliated corporate sector has been the primary beneficiary of China’s economic policies over the past 15 years when the people needed to accumulate household wealth before they became old.

The gains of the corporate state at the expense of the household sector are entrenched through related policies, such as what economists term the “financial repression” of households. Since there are few investment alternatives by individuals besides speculating on real estate or in the stock markets, their savings are deposited in state-owned banks that offer extremely low interest returns (an average of 1.5% over the past decade.) State-owned banks extend the majority of the loans at below-market rates to SOEs, which use the funds for capital projects or to pay back the interest from existing loans. The result is that the country’s struggling households have been subsidizing the investments of the bloated and inefficient SOEs.

In addition, only around 15% of workers, mainly those in the SOEs, have some form of pension. But even these state-backed pensions are largely unfunded and may well amount to 40% to 50% of GDP. For the majority of people, more than half are likely to depend overwhelmingly on their children to support them in their old age. This will put significant pressure on the disposable income of future generations that would otherwise be used to underpin the transition towards a consumption-led economy.

Even now, more than half the living expenses of the average rural retiree is met by family transfers, while that for urban retirees is one quarter.

The bottom line is that the 30-year economic boom was mismanaged by the government when it came to dealing with China’s aging population. The focus should have been on raising household incomes at a faster pace than GDP growth, so that private citizens could comfortably provide for themselves in the future.

Unlocking maximum benefits for the public from continued economic growth would demand an enormous SOE privatization drive — although such policies would be pointless if well-connected families are allowed to snap up SOE shares as occurred previously. Forcing state-owned banks to lend on merit rather than on policy and political considerations would also give millions of private companies the opportunity to prosper at the expense of the less efficient SOEs.

Allowing private domestic companies equal access to lucrative domestic markets would maximize the chances that households could acquire enough wealth to meet old age needs.

These reforms, rather than simply abandoning the one-child policy, would better position China for its future demographic challenges. Yet, the Fifth Plenum offered little indication that the Party intends to abandon the state-dominated model. Policies are being fine-tuned that are intended to help SOEs become more efficient rather than reducing their economic role, which helps them to become even more dominant. SOEs are to take the lead in China’s “indigenous innovation” drive in strategic sectors, meaning even more cheap capital, subsidies and tax credits being given to the state-owned companies.

The enormous government procurement market still offers privileged access to SOEs. The party refuses to accept that the corporate state is the problem rather than the solution to China’s demographic and economic woes.

The French philosopher and sociologist Auguste Comte once said that “demography is destiny.” The upshot for China is that age will almost certainly erode the Chinese economic miracle. But the real tragedy is that the chances for the vast majority of the population to age gracefully, with basic needs met, are fading fast.

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