INSIGHT: China on the verge of a population and economic crisis

07 April 2011 16:26  [Source: ICIS news]

By Joe Kamalick

Chinese government poster for one-child policyWASHINGTON (ICIS)--China is on the verge of a major population dip that could topple its economy within a few years, a US demographic authority argues, warning that US chemical companies and other manufactures should avoid capital investments in the Middle Kingdom.

Demographer Kenneth Gronbach says that China’s 33-year-old “one child” policy to reduce population growth was “a demographic blunder” that soon will trigger a generational time bomb that could have broad destabilising effect on the nation’s economy, society and its government.

In what amounts to a reversal of the sort of “baby boom” that fuelled US and European economic expansion in the post-World War II years, China has engineered a “baby doom”, a deliberate and often brutal reduction in its birth rate.

Particularly in the US, the baby boom of 1946-1964 produced a population surge that generated a flood of workers and consumers who in turn drove the nation’s post-war growth, creating demand for housing, products, education and services at an unprecedented pace.

In China’s post-Mao period, it is as if that US population line graph has been turned upside-down. The giant nation has created what might be called a generation-long population vacuum, a vacuum that now might well suck the air out of what so far has been spectacular Chinese economic growth.

China introduced its one-child policy in 1978, and beginning in 1979 imposed fines and denial of services to urban families that violated the mandate by having a second baby. Some rural populations were exempted from the policy, as were ethnic minorities, but the one-child campaign affected the vast majority of China’s households.

The policy was aimed at countering what Chinese leaders at the time feared would be major complications of over-population, including burgeoning urban slums, epidemics, overwhelmed health, education and law enforcement services and perhaps food shortages, even famine - all of which could destabilise or bring down the central government.

By China’s own accounting, the policy prevented about 400m births between 1979 and 2010. 

Because adult children remain the principal source of support for elderly parents, many Chinese couples that started families in the 1980s and later wanted to have a male as their one allowed child, with the expectation that a son would more likely be able to support them in their old age.

Over the past 30 years, the one-child policy has been implicated in a sharp increase in forced abortions and widespread female infanticide, with the result that China now has a disproportionately large population of 20- to 30-year-old males compared with women.

Gronbach, who lectures widely in the US and elsewhere on the influence of demographics on business, noted that “In the 1960s and 1970s China was having 40m babies annually, but that birth rate has now fallen to close to 10m per year”.

China reduced its fertility rate from four or more kids per family to one child for most households, a 75% reduction,” he said.

According to the CIA World Factbook, China’s fertility rate fell from more than five births per couple in the early 1970s to approximately 1.8 births per household in 2008. That rate is below the normal pace of two-plus births per household needed to sustain a nation’s growth.

As a consequence of the one-child policy, Gronbach says, China’s 30-something men and women are confronted with a daunting task, because that age group, the 25- to 35-year-olds, is fully 75% less in number as a result of the one-child policy.

“The issue is that it will be the responsibility now of those 30 and under in China to do the heavy lifting - caring for the growing population of elderly and for the nation’s children,” he said. 

“The 30-somethings will have to do the majority of China’s production, consumption and tax paying, and when you have a 75% reduction in the group that is chiefly responsible for those activities, you’ve got a real problem,” he said.

Gronbach said that China is already beginning to feel a labour shortage that will only get worse as the much-diminished one-child generation moves into its principal productive years.

“So what is China going to do? For one thing, their emerging generation is cut by 75%, and yet that group must be responsible for feeding and caring for the country’s huge population explosion of seniors over age 65.”

Citing the Chinese government’s policy of condoning decades of abortion and infanticide, he said that the Beijing government “likely will take a similar position with euthanasia”.

But even such draconian measures will not help much, he said.

“In the next 10 to 15 years, I think China is going to have major production problems, and if the government continues to adjust the value of the yuan against the dollar, their exports will increase in price proportionately.”

“They will experience a labour shortage that will tighten their production capacity,” Gronbach said.

The generation of 30-something Chinese males may be reduced even further, he argues, because there could well be a marriage migration. 

He said the gender imbalance brought on by the one-child policy and its lowering of female births over the past three decades means that there are 20m to 30m young Chinese men of marriage age who will not be able to find wives in China, and many will leave for other areas of Asia.

All of this could have profound impact on China’s economy, production and political structure, he contends.

“If you are going to do business in China, fine,” he said, “but lease, rent, don’t buy assets there”.

China may appear stable, but it’s a facade,” he said. “They’ve committed the biggest demographic blunder in history, and there’s nothing they can do to fix it.”

He said that parallel population problems are facing other Asian nations, especially Japan - “where they have simply stopped having babies it seems” - but including Korea and southeast Asia.

In contrast, Gronbach said, North and South America and especially the US are poised for growth. He noted that the US birth rate of 2.2 children per household is above the replacement level, and the US is the only major industrialised nation that has a replacement-plus birth rate.

He said he foresees manufacturing returning to the US as Asian demographic problems accelerate.

“I think you will see immigration and capital inflow to the US like we’ve never seen before,” he said. Manufacturing is more expensive in the US than in most offshore locations, he conceded, "but it is dependable, reliable, stable".

“We have the largest crop of young and sophisticated workers in the history of this country, and when the US economy comes back, it will come back with a bang,” he said.

“My advice to the US chemicals industry would be: It’s best to invest in the US and Canada.”

Gronbach is the author of several books on demographics and business, including “Common Census” and, most recently, “The Age Curve”.

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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