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China’s Demographic Crisis

Australia, Business, China, Company Strategy, Economics
By John Richardson on 12-Jun-2012



           Chinese govt poster promoting the one-child policy  



By John Richardson

IF all you can remember is strong emerging markets growth, then it is easy to be misled into only building into your scenarios the notion that China and India are merely pausing for economic breath.

Conventional wisdom remains that this is, decidedly, the Asian century – and that the demand for chemicals will continue to boom on the rise of the continent’s wealth.

But, as we shall discuss in several blog posts over the next few weeks, nothing is guaranteed as the New Normal evolves. Chemicals and other companies that fail to build the downside risks into their planning processes are failing in their responsibilities.

This applies across all sectors, of course, including liquefied natural gas (LNG). There are some Aus$200bn of projects in Australia alone being planned, all of which, we were assured yesterday, would be successful because of “strong population growth” in China and India.

But when we raised the issue of China’s one-child policy, we were told “that’s (just) high-level stuff. Demand will always be there in Asia. Just look at Malaysia, Indonesia and Thailand.”

Hold on, though, isn’t Southeast Asia heavily dependent for growth on China?

China will see its population shrink, rather than expand, according to Guo Zhigang, professor of sociology at Peking University.

“At China’s current total fertility rate, the country’s population will shrink to just 800m by the end of this century,” he wrote in the June issue of the China Economic Quarterly (CEQ).

“Even if China adopts a pro-birth policy (there are no signs of this at the moment), experience from other developed countries suggests that reversing the downward spiral is very difficult.”

The economic consequences both of this overall decline in population and the ageing of the population will be huge, as we discuss in chapter 6 of our e-book, Boom, Gloom & The New Normal.

“China’s rapidly ageing population will have enormous economic and social implications. The demographic dividend China enjoyed over the past 30 years – especially in 1980-2000 – is now largely exhausted,” wrote Wang Feng, director of the Beijing-based Brookings-Tsinghua Center for Public Policy, in the same issue of the CEQ.

“In 1980-2010, the effect of a favourable population age structure accounted for between 15 percent and 25 percent of per-capita GDP growth.

“As China’s demographic fortunes reverse, the economy will slow down regardless of other factors driving growth. Since China’s economic and political governance model is premised on near double-digit growth, this will require substantial policy change.”

There are surely no guarantees that all the right policies will be adopted and that, even if they are adopted, they will be effectively implemented.

And there are no guarantees that, even with the best of possible policy outcomes, China will overcome such a big demographic challenge.

“Over the next 20 years, the ratio of workers to retirees (presuming workers continue to retire at 60) will drop precipitously from roughly 5:1 today to just 2:1,” adds Wang.

The same issue of the CEQ also argues, in separately authored articles, that China’s demographics will deliver some benefits as well as problems. For example, Tom Miller, managing editor of the CEQ, says that China’s army of single children, doted on and heavily subsidised by their parents, will create more consumerism.

But clearly, chemicals and other companies cannot, and must not, assume that growth will just happen – and that, therefore, their capital investments will easily be justified.

Macro-economic analysis is not something that can be outsourced to the International Monetary Fund and the World Bank etc. It has to be conducted in-house.

As fellow blogger Paul Hodges points out in this post, spread sheets might be telling you all is right with the world, but spread sheets alone cannot model the future – especially if they involve “garbage in, garbage out” data.