Fra Fathom Consulting/ Thomson
t is likely that China’s labour force has already peaked. We estimate that demographic factors will subtract close to one percentage point from China’s sustainable rate of growth over the next five years. Much has been made of recent plans to reform further China’s one-child policy. But in truth, China has not pursued a strict one-child policy for more than 30 years. The latest changes by themselves will not and cannot defuse China’s demographic time bomb – the fuse was lit long before the ‘one-child’ policy was introduced in the late 1970s. Based on official estimates, which see the new ‘two-child’ policy adding 30 million to the labour force by 2050, what might have been a 19% slump in the size of China’s labour force over the next 35 years will instead be a mere 16% collapse.
China is entering a severe cyclical downturn. As regular readers of this column will be aware, we have long doubted China’s official GDP statistics, to such an extent that we have constructed our own alternative metric. Fathom’s China Momentum Indicator (CMI) suggests that growth in the world’s most populous nation has more than halved since the beginning of last year, from just over 6% to just under 3%.
But looking beyond the current economic cycle, what is China’s longer-term growth potential? That is the focus of this week’s News in Charts.
China’s Demographic Time Bomb
Simple arithmetic tells us that a country’s sustainable rate of growth is equal to the sum of the rate of growth of its labour productivity and its labour force.
Scope for further gains in labour productivity …
In the case of China, one side of this equation gives grounds for cautious optimism. As economies develop, the proportion of the total workforce employed in agriculture tends to fall as labour migrates to other sectors, such as manufacturing, where the level of productivity is higher. As our table shows, a worker employed in China’s secondary industries is, on average, more than four times as productive as a worker employed in China’s primary industries.
Although this migration process is well underway in China, it has further still to run. By the end of last year, close to 30% of all those in employment were working in China’s primary industries. An equivalent figure for most developed economies would be in the low single digits. Our optimism in this regard is nonetheless tempered by legislative barriers to the free movement of labour in China. A system of household registration known as ‘hukou’ restricts access to benefits, along with a number of other rights, to the town in which an individual was born. The system has been relaxed somewhat in recent years, but it remains the case that China’s labour force is, geographically at least, relatively immobile.
… but labour force set to fall
The other side of the equation is much less encouraging. China’s population is ageing fast. According to the latest UN projections, the number of people in China who are aged between 15 and 64 is set to fall by close to 50% before the end of this century. That is a much steeper decline than we are likely to see almost anywhere else.
What will be the impact of China’s ageing population on its labour force, and by extension on its sustainable rate of growth? The International Labour Organisation (ILO) provides estimates of labour force participation rates in China broken down into five-year age bands ranging from 15-19 right up to 60-64, and 65+. Holding within age band participation rates constant, and feeding in UN projections for China’s population, we obtain a forecast for China’s labour force that is set out in the chart below. Worryingly, on this basis, China’s labour force looks to have peaked right about now.
It is the rate of change of a country’s labour force that contributes to its sustainable rate of growth. Our chart suggests that demographic factors were contributing as much as three percentage points to China’s sustainable rate of growth in the mid-1980s. But their contribution has eased since then. We estimate that demographic factors have knocked around 0.7 percentage points off China’s sustainable rate of growth over the past ten years. Their contribution is likely to fall by a further 0.7 percentage points over the next five years, and it is likely to continue to fall for a period of time thereafter.
Five-Year Plan To The Rescue?
Last month, as part of the 13th Five-Year Plan, the Communist Party announced proposals to replace China’s so-called ‘one-child policy’ with a ‘two child’ policy. But these reforms are more modest than at first it might appear.
As our table below sets out, China’s one-child policy has a long and varied history. Couples were first encouraged, rather than required, to have just one child as long ago as 1975. In 1979, a marriage law was introduced that made it an offence to have more than one child. But this was the year in which the restrictions on family size reached a peak. As early as the following year, the first of many amendments was passed that allowed rural families, which at the time made up 80% of the population, to have a second child if the first was a girl.
A strict one-child policy was only ever in full force for a single year. It is plain even from the official statistics that a good many families already produce more than one child – last year first births accounted for no more than 60% of all births.
Replacing what was left of the one-child policy with a two-child policy will not solve China’s demographic problems. These are deep rooted, and were in train long before the one-child policy was introduced, as our final chart shows. The latest changes are marginal – China has not had a strict one-child policy for more than 30 years. And of course, they will not affect the size of China’s labour force for the best part of 20 years.
Conclusion
China’s demographic time bomb is potentially as explosive as that facing almost any other country. The stark truth is that China’s labour force has probably peaked already. From this point forward, demographic factors will act as a drag on China’s sustainable rate of growth. Officially, the new two-child policy is expected to add 30 million to China’s labour force by 2050. Even if that estimate is correct, it will simply turn what might have been a 19% slump in the size of China’s labour force over the next 35 years into a more modest 16% collapse.
