The favored position of the corporate state at the expense of the household sector is visible in other policies as well. For example, the need to provide for oneself in old age in the face of a one-child policy that precludes multiple children as an old-age support mechanism contributes to the high savings rates of Chinese households, approaching 40 percent of net income. Since there are no alternatives, household savings are deposited in state-owned banks and pay extremely low interest rates (around 1–2 percent on average over the past decade). These state-owned banks extend the majority of their loans to SOEs at below-market rates, and most of these loans go into fixed-asset investments. Thus, the country’s struggling households are effectively subsidizing the investment activity of the country’s bloated and inefficient SOEs.
It is clear that China’s suppressed household sector and unequal growth exacerbate the country’s unpreparedness for an aging population, since many future retirees will be in a far worse and more vulnerable financial position than they otherwise could be as citizens of a rapidly growing economy without such distortions. Indeed, the economic suppression of the average Chinese citizen in favor of SOEs—resulting in household income significantly lagging behind rates of GDP growth—is reflected in the country’s infamously low levels of domestic consumption. As a proportion of GDP, Chinese domestic consumption—at 33 percent—is the lowest of any major economy in the world. This compares to around 70 percent for the United States and 60 percent for Japan.
This unpreparedness is exacerbated by the reality that only around 15 percent of Chinese workers, mainly from some SOE-dominated sectors, have some form of central, provincial or local pension fund. According to one recent Organisation for Economic Co-operation and Development study, only around 10–15 percent of those with a pension will still depend primarily on their children for old-age support. For those without a pension, the number jumps to over 50 percent.
Although the current pension scheme covers a minority of citizens, the consensus among experts and researchers is that the state’s pension liability amounted to about $2.7 trillion in 2010 and will hit $2.9 trillion in 2013. Calculations by a team based at Fudan University led by Cao Yuanzheng, the chief economist with the Bank of China, estimate that unchanged pension policies will lead to liabilities of $10.25 trillion by 2033 (or almost 40 percent of GDP, based on a generous assumption of 6 percent GDP growth per year). There also is the question of mismanagement and even misappropriation of these pension funds, particularly by local officials. According to a report in the Economist, about half of the pension funds run by provincial authorities have lost value, while reports of local governments reneging on pension liabilities are widespread.
IN ISOLATION, GDP growth rates offer no decisive indication of how a country is actually faring. After all, the economy of the former Soviet Union officially tripled in size from 1950 to 1973, but a mere two decades later it had imploded. While China’s economic development appears far more impressive, the country’s challenges inherent in its aging demographics remain highly daunting.
For starters, growth through ever-increasing levels of capital and labor inputs will not do the trick. The ratio of capital input needed to achieve an additional dollar of output has jumped from around 2 to 1 in the early 1990s to around 7 to 1 currently, which is 50 percent more inefficient than what is seen in economies such as India’s. The ongoing buildup of NPLs in the Chinese banking system is merely one such indication of declining capital efficiency. The country’s aging demographics also mean that the seemingly endless supply of cheap labor underpinning the country’s construction and manufacturing sectors will gradually recede. But sustainable growth will depend on China’s capacity to use capital and labor much more efficiently than it has to date. As economist Paul Krugman of Princeton and the New York Times puts it, “Productivity isn’t everything, but in the long run it is almost everything.”
Second, sustained economic growth based on productivity gains is only one part of the solution as China ages. The other is to ensure that across-the-board household incomes increase at least as rapidly as overall GDP growth. In other words, there needs to be a massive transfer of assets and opportunity from the state-owned sector toward the private sector in order to raise significantly household wealth and income. This also would help the economy transition toward more domestic consumption, a necessary development for sustained growth.
Significantly increasing household income and total factor productivity (TFP), meaning getting more output from capital and labor, will require a winding back of SOE wealth and opportunity—and, by implication, the role of the Communist Party in the Chinese economy.
For example, land reforms in the early 1980s allowed plot holders to produce whatever they wanted after meeting minimum quotas and selling surplus produce at market prices. This led to the rise of “township and village enterprises,” a spontaneous and unplanned explosion of community-led small industry. Although these were technically owned by local governments, they were run by private households that were allowed to keep most of the profits. Importantly, household incomes during this decade of Chinese rural entrepreneurialism rose at rates that corresponded with GDP growth. This period actually witnessed the effective retreat of the state in economic activity, and four-fifths of the poverty elimination that has occurred since 1980 was achieved during this first decade.