The Economic Angle in the China Debate

May 9, 2021 Topic: economy Region: Asia Tags: ChinaXi JinpingEconomyGrowthCompetition

The Economic Angle in the China Debate

The chief cause of these building economic pressures is China’s top-down, centrally directed approach to economic decisionmaking.

Even though Beijing has recently relaxed its one-child policy, the fertility rate seems not to have risen. Even if it does eventually rise, it will take fifteen to twenty years before those children can begin to affect numbers in the working population. Nor can China look to in-migration as a way to alleviate the strain. Few seem eager to enter Beijing’s jurisdiction. China, in other words, must live increasingly with the severe economic constraints imposed by a past policy error. By 2040, absolute numbers in the country’s working population will, according to UN estimates, have declined by 10 percent, while its population of dependent retirees will have increased some 50 percent. The economy will have barely three workers for each dependent retiree. Those three workers will have to produce enough for their own needs, those of their other dependents, and one-third the support of an old-age pensioner. With little surplus production available for future investments much less grand projects, the economy will have lost much of its dynamism and flexibility.

Aging demographics will also threaten China’s ability to innovate. Demographers, using patent data and statistics on Nobel Prize winners, have determined that people in the thirty to forty age cohort provide the bulk of society’s inventiveness. Cross-country studies show that this fact holds in all cultures and economic systems. This age cohort in China is set to shrink over the next twenty years from 43 percent of the workforce to 37 percent. Meanwhile, the need to care for the nation’s growing elderly population will add to China’s already overhanging debt burdens. Fully 25 percent of the adult population will exceed sixty-four years of age by 2040. Since less than 65 percent of Chinese workers have any kind of pension plan, much of the burden of supporting this huge population of retirees will fall on Beijing’s shoulders, absorbing tremendous amounts of government resources. The International Monetary Fund (IMF) estimates that Beijing’s unfunded pension obligations already amount to 100 percent of the country’s gross domestic product (GDP). Unless Beijing’s decisionmakers act quickly, which they seem to have no plans to do, that burden will only grow. 

Though China clearly has severe economic problems, none of this says that China will disappear as a major power or that its economy will cease growing. Nor does it imply that the United States can just sit back and wait for the economic difficulties to eliminate the China challenge. It does say, however, that contrary to most of today’s media discussions, China is far from the economic juggernaut it once seemed to be. It makes clear that the country’s growth rate will slow appreciably in the not-too-distant future, as will its pace of development and innovation. Beijing will be less able to wow observers with grand investment schemes. Further, it warns that these impediments to Chinese grandeur will become increasingly significant as the demographic burdens intensify and its planners in Beijing face an ever-more problematic task setting productive economic directions. To say that the situation will be fraught is to understate, especially since Beijing relies on economic dynamism as a base from which to challenge the United States and its allies.

Milton Ezrati is a contributing editor at the National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York-based communications firm. His latest book is Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live. 

Image: Reuters