Chinese Economics Thread

[Blitzo]

One of the arguments which suggest that the decline in working population may not be as significant as sometimes espoused, is that despite the decline in working age population, the people who make up that population will be better substantially educated than their predecessors, which can help to facilitate growth.
Of course, there are all sorts of arguments to be made about the quality of education and how that translates to actual economic productivity, as well as how accurate various projections of demographic change vis-a-vis economic productivity and the dependency ratio will play out... so at this stage I think it is still early days yet.

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Quality of China’s workers to rise, even if number falls

Steve Johnson

Fears that China will “get old before it gets rich” dominate much of the medium to long-term thinking about the world’s most populous country.

China’s working age population is expected to fall by more than 10 per cent, a loss of 90m people, by 2040 as a result of its declining birth rate. Simultaneously, rising life expectancy will increase the number of retirees, raising the country’s dependency ratio, which measures the number of children and pensioners per person of working age.

As a result, some believe that China faces a future of declining economic growth, rising labour costs as workers become scarcer, and higher government spending on pensions, sapping the vitality of one of the world’s key growth engines. Worse still, this will happen before China becomes as wealthy as ageing nations in the west, limiting the resources available to manage the adjustment.

However, analysis by the FT in December, based on World Bank data, suggested that this need not happen at all. Indeed, even as the working age population falls by 10 per cent, the size of the labour force could actually rise by 10 per cent as retirement ages rise from their current low levels and more women join the workforce.

Now two banks, Standard Chartered and UniCredit, have produced their own theses arguing why the panic over China’s evolving demographics is overdone.

The central argument of Fadi Hassan, assistant professor of economics at Trinity College, Dublin, and consultant for Italy’s UniCredit, is that China’s demographic transformation should be kept in perspective.

Mr Hassan notes that, barring very small countries, China currently has the second lowest dependency ratio in the world, beaten only by Moldova. At about 37 per cent, China’s ratio is a fraction of the 80 per cent or so it reached during the 1970s, before the effects of China’s two-child policy, initiated in 1970, and one-child policy, which came along in 1979, kicked in.

Mr Hassan forecasts that China’s dependency ratio will rise in the coming years, but only to about 47 per cent by 2030, as the recently announced relaxation of the one-child policy starts to feed through.

At such a level, the Chinese ratio would not be markedly out of step with current norms in other large emerging markets, and would be comfortably lower than today’s developed world levels, as illustrated in the second chart.

Although Mr Hassan, like many commentators, does not expect a sharp rise in the birth rate, he believes it will edge up enough to keep the dependency ratio stable in the mid-40s.

As such, he regards the likely rise in the dependency ratio as both a “minor adjustment” and a “rebound” towards a more “natural” level.

Moreover, Mr Hassan estimates that the impact of the smaller working age population on growth in gross domestic product will be relatively minor, at 0.35 percentage points a year, at most.

In reality, the dent in growth will be smaller than this if, as he expects, China sees a rise in the labour market participation rate among women and older workers.

Mr Hassan also argues that, even as the quantity of the working age population falls, its quality will rise, thanks to improved education.

Se Yan and Shuang Ding, economists at Standard Chartered, have looked more closely at this latter point.

They note that, in 2010, just 3.9 per cent of China’s labour force had a college education, way behind the average across the OECD, a club of mostly rich countries, of 29.6 per cent, and comfortably below even the likes of India, Turkey and Brazil, as the third chart shows.

However, in 1999 the Communist party pledged to rapidly expand tertiary education and raise the college enrolment rate from 9 per cent to 15 per cent by 2010. (This enrolment rate measures the percentage of those who finish middle school, typically 40-50 per cent of children, who then go on to college).

In the event, college enrolment rates rose far faster still, surpassing 80 per cent by 2010 and hitting a record high of 89 per cent in 2014, as the final chart shows.

“This unprecedented growth in college education is reshaping China’s demographic structure,” says Mr Yan.

He calculates that about 60m college graduates have graduated in the past 15 years, taking the share of the workforce aged 25-34 with a higher education to 8 per cent.

By 2030, China will have 220m college graduates, he forecasts, accounting for about 27 per cent of the labour force, approaching the level in Germany, France and the UK today (although this figure will almost certainly have increased further in Europe by 2030).

“China will have the world’s biggest pool of educated labour, opening up vast potential for future economic growth,” Mr Yan argues.

“While falling supply of unskilled labour is eroding China’s competitiveness in low-end manufacturing sectors, we think a new demographic dividend is emerging, based on quality rather than quantity of labour.”

One criticism might be that even if China raises the proportion of workers with a tertiary education to western levels, it might still trail behind if the quality of its higher education is lower than elsewhere.

However, Mr Yan, a former university professor, believes that standards are just as high in China as elsewhere, particularly in subjects such as engineering and science.

Mr Hassan argues that even if educational standards are lower in China, it does not invalidate the broad argument.

“Some college, even if not such a good college, is better than no college,” he says. “They are not going to receive a Swiss or UK-type education, but it’s going to be better than they used to receive in China.”

 

[Blitzo]

There's also the big factor of automation, which has widely been speculated as something which will reduce the need for more workers.

The Chinese govt has of course publicly and vigorously set a pro automation policy to improve competitiveness in production, and this is another major factor which will probably play a part in determining how big the effect of a decline in working age population will be.

If they hit the timing just right, they could be able to get the best of both worlds by balancing the increase in production competitiveness via automation, at the same time as the working age population begins to significantly decline.

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China’s robot army set to surge

Steve Johnson

China’s uptake of industrial robots is set to rise rapidly in the coming years as higher labour costs and the heightened aspirations of workers push manufacturers to embrace automation.

The development may add to fears that workers in poorer countries are most in danger of being displaced by automation, with analysis by Citi and the Oxford Martin School, a research and policy unit of the UK university, published earlier this year suggesting that more than 75 per cent of jobs in China are at a “high risk” of computerisation.

Mirae Asset Management, an Asia-focused house with $75bn of assets, predicts that China’s robot army will expand at a compound annual growth rate of 35 per cent until 2020.

Given that the International Federation of Robotics estimates that China had 260,000 industrial robots last year, Rahul Chadha, chief investment officer of Mirae, says: “Using the rule thumb that one industrial robot replaces four to five workers, this suggests that robots have rendered more than 1m people jobless.”

This figure is set to rise sharply in the coming years. As the first chart shows, the number of robots per 1,000 employees in China, as of 2013, was just 30 per cent of the level in North America, 11 per cent of the German figure, 9 per cent of Japan’s tally and 7 per cent of that in South Korea.

Mirae argues that China’s use of robots is tracing the path blazed by Japan a quarter of a century ago, and still has several years of rapid expansion ahead of it, as the second chart shows. This concurs with forecasts from the IFR, which says China acquired 57,000 robots in 2014 but is likely to be buying 150,000 a year by 2018.

Mr Chadha, who calculates that robots will replace around 3.5m Chinese workers over the next five years, says: “The message that comes from the leadership is on improving productivity via automation. They are paranoid about doing things quickly, they believe they have got to because their competitors will do the same. “When I meet companies on the ground, they say ‘the demand environment is not great, what we can do is improve our processes, improve our productivity’.”

Mr Chadha believes the process is being driven by the changing dynamics in the labour market. Until recently, China’s low wage levels minimised the benefit of replacing labour with capital.

This is starting to change, however. While hourly wages in Chinese are still relatively low in absolute terms, they rose at a compound annual growth rate of 17 per cent in the decade to 2012, far outstripping pay growth in other major economies, as the last chart shows.

Although the pace of wage growth will inevitably slow, the availability of labour is also likely to tighten. Whereas the size of China’s labour force rose by 80m people to 930m in the decade to 2010, Mirae believes it is likely to flatline for the next few years, before slowly declining.

Moreover, Mr Chadha says the younger workers who are still entering the labour force are increasingly shunning the manufacturing sector, with a better educated population preferring service sector employment to often tedious, repetitive and potentially unsafe industrial jobs.

Because of this, and the flat labour force, he does not believe the likely rise in robot-driven redundancies will cause social problems or unrest in China, or in neighbouring countries with similarly low birth rates such as Japan and South Korea.

However, he says the automation trend “has huge social ramifications for somewhere like India, the Middle East or Africa, where you have good demographics. India needs to create 10m jobs a year.

“This is an added challenge for these economies. They have to do something different to attract investors, or we will see more tariff barriers,” Mr Chadha fears, as poorer countries attempt to maintain employment levels by barring imports from countries with higher, robot-driven, productivity.

At present, foreign companies still dominate the market for robots in China, with the likes of Japanese duo Fanuc and Yaskawa Electric, Swiss-Swedish group ABB and Kuka of Germany accounting for two-thirds of sales, although this is down from three quarters in 2009.

However, Mirae notes that domestic producers now have almost half the market share in more basic segments such as handling and dispensing, even as they are smaller players in higher tech areas such as assembly and welding.

Profitability for China’s leading producers, which include HollySys Automation and Shenyang Siasun Robot & Automation, “is still depressed because of their aggressive pricing strategy and lack of expertise in core components manufacturing”, Mirae says, although it expects the pricing differential to narrow as Chinese companies focus less on gaining market share.

I think it really is lucky that the robot automation revolution is arriving at a time when China's economy is transitioning to a more service based one, and where its labour pool is also expected to decline in coming years, meaning even if robots begin to replace humans in some jobs, it will not matter as much in a social sense, because the labour force will not only be smaller but will also be more well educated and oriented for more complex jobs beyond merely production lines.

Automation, combined with China's existing dominance in concentrated supply chains may even help to maintain or increase China's ability to produce mid tech and high tech products indigenously.

However I do have great concern for other developing countries like India, Bangladesh, Vietnam, etc not to mention Africa, who may find it more difficult to use the "China model" of growth for themselves -- i.e.: they all have substantial potential for exploiting low cost labour, but may be unable to compete with highly automated and thus low cost production lines in China, but also similar production capability in developed countries... if those nations are unable to release their "population dividend" they may find it very difficult to grow their economies one automation takes a firm hold in a decade's time.

 

[Yvrch]

Indeed there are a lot of moving parts interacting each other on the scatter chart, just like Bltizo mentioned.

As soon as I saw Janiz post, I saw another China collapse theory coming along with all its usual canards and machinations. I saw it coming a mile away. And I did notice Gordon Chang piece couple days prior on the same thing. That's why I said just song and dance. China debt, China threat, China population. It's the same routine that will keep on feeding itself ad nauseam.

When was the last time China had her long form census? That's a very important data point to consider.

How many, if any, country specific population studies actually remain relevant when the subsequent full-on census was done after the studies? Anyone? Yes, they have shelf live that lasts only so long as the next full census.

China relaxed her one child policy this year, so penciling a future trend line based on past data of one child policy is dubious at best. That policy change alone is a huge factor that would make any studies obsolete, irrelevant. We would need to wait at least two more long form census to really understand the effects of two child policy. China did 2% census interim census between full-on ones, but margin of errors is anybody's guess.

Population statistics go on a longer time scale. So let's allow children born first if you want to speak about 30 years predictions.

 

[Yvrch]

One way of China managing her domestic reforms is borrowing the opinions and rules of foreign organizations and markets who would argue for the same things that reformers are pushing but experiencing a domestic headwind. Examples would be setting up of SEZ's, to borrow or substitute the missing price, joining the WTO, for the missing market.

Zoellick and Li Wei report served the same purpose, pushing the domestic reforms via foreign orgs. One of the main purposes of that report, couched among so many other fluffs, had been already accomplished - the lifting of one child policy. Actually the report came out after the last China's long form census just to have a maximum effect on decision making. So anybody citing that report from today's point of view on population is more akin to driving ahead looking through the back mirror.

Population is regarded as one of the key factors of modern economy, as it is the L in many growth models and functions. It's related to supply side, as in factors of production, which basically is output, aka GDP. Whether we can agree on trickle down or deficit spending is altogether different matter.

 

[AndrewS]

A lot of points have been made on the chinese population, but they simply aren't relevant.

We can see China automating and replacing unskilled labour with robots, which will vastly increase the productivity of the remaining workforce. What is more important is China's investment in tertiary education to replace that low-skilled labour, and on that metric, the younger generation scores very high.

It's the same path Japan and the other East Asian Economic Tigers took - but with the significant difference that robotics is now fulfilling its potential given the combination of cheap processing power along with cheap machine learning/vision/sensors

As for Greece, it keeps having to be bailed out because it can't default on its debts, nor devalue its currency, nor print more currency to pay off its debts. There are loads of articles and studies on the situation if you just read the Economist every week.

 

[taxiya]

Japan's economic malaise in the last 20 or so years are extensively commented and studied over that period. Your version is rather unique. Do you have any published economic analysis that supports it?

Do you have any economic analysis that supports such a position?

No and No. This is my original idea.

And no I am not going to quote anyone else I am very skeptical of the mainstream economists for their near-sightness, political/ideological/religious charged thinking. Contrary to their commonly used mathematical formular based methods over span of decades, equipped with theories that was born after modern capitalism and studies financed by interest groups, I study economy through archeological and anatomical methods, I base my belief on Karl Max's dialectical materialism, historical materialism. Although I believe his utopian communism is only a theoretical mathematical equation (not realistic), I do believe that his explanation of past and current human activities is accurate.

The other base of my analysis is Chinese traditional thinking of long term, and high up, not being distracted by details. Attention to details is necessary for natural science but sometimes misleading in social science.

That is why I see the debt issue as a symptom rather than a cause of Japan's decline, and for the same reason the decline of all other one time big powers like British, Spanish, Duch Empires and the ancient ones like Mongols. Japan is not unique, not the first and won't be the last.

Additional note, another way to see the Japanese debt issue. It's debet is more than 200% of GDP almost double that of EU, but it is mostly domestic debt, Japan also has a much lower tax rate than EU. So one can think the 100% of the 200% debt owed to the population as a tax cut. The state defaulting on that 100% can be seen as collecting delayed tax, one way or the other, tax or defaulted debt, it's the population's money. The fault of the mainstream economists are they believe that there's a difference, they are fooled by their formulas, dog chasing its tail kind of thing. After removing the 100% Japan is no worse than the EU or US.

 

[solarz]

The issue is really about an aging population, the trend and how it would possibly impact the future economy. In the 1980s, the proportion of the working-age population (fifteen to sixty-four years) was more than 73 per cent of the overall population. Currently at about 68 per cent, the working-age population is expected to decline to about 65 per cent in 2020, and 60 per cent in 2035. It is expected that by 2015 the absolute size of the labour force will begin to shrink as more people leave than enter the workforce (World Bank, China 2030, p. 8.).

The significance of these numbers become apparent when one compares the proportion of working-age people with formal retirees. When China embarked on reforms in 1979, there were about seven working-age persons to every retirement-age one. Today, the ratio is about 5.5 to 1. Current projections suggest that by 2035 there will be barely more than two working persons for every retiree. In other words, the old-age dependency ratio will be more than double over the next two decades ( World Bank, China 2030).

The age profile of the working population also matters as workers are at their most productive and innovative from their late twenties to their mid-forties. This has been the basis for China’s ‘demographic dividend’, the massive productivity generated by the combination of declining fertility levels and a mass of young workers entering the workforce with relatively light familial responsibilities or burdens. In fact, one study estimates that the effects of a favourable working-age population alone accounted for between 15-25 per cent of per capita GDP growth in China from 1980-2010, and that this advantage is all but exhausted (Feng Wang, ‘Racing Towards the Precipice’, China Economic Quarterly, June 2012).

Such trends cannot be arrested or reversed easily even with the recent change to the one child policy. China’s aging population is largely the result of an increase in average lifespan, which has increased from under sixty-five years in 1980 to the current seventy-five years. Fertility rates have also declined, from 2.63 children per woman in 1980 to about 1.5 in 2011. Wealthier cities such as Shanghai which has a reported fertility rate of only 0.6, the lowest of any major city in the world, provide evidence that emerging Chinese middle classes, like Western counterparts, are choosing lifestyle and career opportunities over larger families.

In Canada, what a typical farming family manages would have taken an entire village in China back in the 80's. Machinery and automation reduces the need for manual labor.

Having a shrinking labor force is a normal and in fact, *desirable* trend, because the alternative is to have a large number of people of working age who are unemployed. *That* is a recipe for social disaster!

In fact, one could argue that China already has a surplus of labor, and one of the government's biggest headaches is how to manage that surplus. The recent infrastructure blitz was aimed in part at creating jobs for that labor force.

 

[SamuraiBlue]

Having a shrinking labor force is a normal and in fact, *desirable* trend, because the alternative is to have a large number of people of working age who are unemployed. *That* is a recipe for social disaster!

Aughhhh, Shrinking labor force doesn't mean a shrinking population all together. The population is not going to change much and you'll have many more elderlies that will require monetary and physical help till they pass away. This means more pressure on to the labor force to sustain the entire population.
OR are you suggesting that elderlies finished with their useful life to society should be discarded as soon as they are no use?

In Japan we have a similar problem but I suspect that the government will hike up the age eligible to obtain pension and have us work longer. Of course this is only possible due to majority of the present work force in their early 50's already trained and familiar with computers and robotics.
Is the work force in their early 50's in mainland China prepared as well?

 

[solarz]

Aughhhh, Shrinking labor force doesn't mean a shrinking population all together. The population is not going to change much and you'll have many more elderlies that will require monetary and physical help till they pass away. This means more pressure on to the labor force to sustain the entire population.
OR are you suggesting that elderlies finished with their useful life to society should be discarded as soon as they are no use?

In Japan we have a similar problem but I suspect that the government will hike up the age eligible to obtain pension and have us work longer. Of course this is only possible due to majority of the present work force in their early 50's already trained and familiar with computers and robotics.
Is the work force in their early 50's in mainland China prepared as well?

Automation doesn't just mean a reduced need for manual labor, it also means increased productivity. You are assuming a stagnant productivity level when the reality is completely different.

Japan is in a completely different place, so any comparison is irrelevant. In fact, China has twice already reduced mandatory retirement age. For government employees, women must retire at 55, and men must retire at 60. They continue to collect pension after retirement, with some getting more from their pension than from their salary. In other cases, many former employees of state enterprises continue to collect pay checks even though they haven't worked for years or decades.

The Chinese government controls the most lucrative businesses in the country through state enterprises. This include banks, petroleum companies, and the ability to sell land to developers. This generates an enormous amount of revenue that would otherwise have gone into private pockets.

This means the Chinese government, unlike many other governments in the world, have a lot of resources at their disposal to tackle whatever problems an aging demographics can bring.

 

[Brumby]

In Canada, what a typical farming family manages would have taken an entire village in China back in the 80's. Machinery and automation reduces the need for manual labor.

Having a shrinking labor force is a normal and in fact, *desirable* trend, because the alternative is to have a large number of people of working age who are unemployed. *That* is a recipe for social disaster!

In fact, one could argue that China already has a surplus of labor, and one of the government's biggest headaches is how to manage that surplus. The recent infrastructure blitz was aimed in part at creating jobs for that labor force.

In my view, the tangent of the conversation about up-skilling and robotics viz a viz economic productivity improvement is completely missing the core nature of the conversation on changing demographics and an aging population. It is about the fiscal burden of a diminishing ratio of working population to retirees and the preparedness of fiscal policies in meeting these challenges beside the social issues of the problem.

The nature of China’s political economy with the inequality of income and national wealth distribution (e.g. dominant of SOE’s) means the country’s unpreparedness for an aging population as many retirees will be in a far worse and more vulnerable financial position than they otherwise could be. This unpreparedness is further exacerbated by the reality that only around one third of all urban residents and less than 5 per cent of rural residents have some form of central, provincial or local pension fund (China’s National Bureau of Statistics figures for 2010). Although the current pension scheme covers a minority of citizens, the consensus amongst researchers is that the state’s pension liability amounted to about US$2.9 trillion in 2013 (Pension Gap to Hit $2.87 Trillion’, China Daily, 14 June 2012). Other reports estimate that the state’s pension liability could amount to US$10.8 trillion over the next two decades (or almost 40 per cent of GDP based on a generous assumption of 6 per cent GDP growth each year ( Aileen Wang and Koh Gui Qing, ‘Analysis—China Slides Faster into Pensions Black Hole’, Reuters, 30 September 2012 ).

In China, it is said that there is a ‘1-2-4’ problem: one Chinese child supporting two parents, supporting four grandparents. In 2006, the ratio of the dependent elderly to those in employment was ‘1:5.2.’ In 2030, it will be ‘1:2.2.’ The worker to retiree ratio will fall from 3:1 in 2006 to 2:1 in 2030 (Minxin Pei and Jonathan Anderson, ‘The color of China,’The National Interest (March/April 2009), 4). Given that the fact that a large number of ageing Chinese will not have a child with the resources to provide for their parents, Eberstadt concludes that there is a ‘slow-motion humanitarian tragedy coming down the track for China (In Frederick Kempe, ‘Demographic time bomb ticks on,’The Wall Street Journal (6 June 2006). There will be significant social and fiscal burden in the future and that in turn will impair future economic activities.