China’s Demographic Shift

From Businessweek yesterday (excerpt):

Why China Is Suddenly Content with 7.5 Percent Growth

For years, there’s been one constant for people talking about the Chinese economy: GDP growth would exceed 8 percent. It didn’t much matter what happened in the rest of the world—the U.S. and other export markets might be thriving or might be struggling, but China would grow at least 8 percent, year in and year out. The country needed to create enough jobs for the millions of young people entering the workforce every year, and the Chinese leadership decided that anything below 8 percent would put job creation in jeopardy...

...That magic, 8 percent number, though, is now history. At his annual address to open the National People’s Congress in Beijing, Chinese Premier Wen Jiabao on March 5 announced that the government has a GDP target of 7.5 percent this year. China hasn’t had a growth target that conservative since 2004.

The European debt crisis is one culprit, with demand falling for Chinese exports. But it’s not just about the Europeans. After years of torrid growth of at least 9 percent, China needs “higher-quality development over a longer period of time,” Wen told lawmakers at the country’s parliament. Economists and investors agree that China is now entering a new era of slower growth, one where the old 8 percent figure is no longer so important...

...And what about the job-creation imperative that made the 8 percent target so critical for so long? China is going through a major demographic shift, thanks to fast economic growth and the one-child policy. As the population starts to age, job creation for millions of young people isn’t so vital anymore. While China needed 10 million new jobs a year in the early 2000s, today it needs just half that number, says Jian Chang, China economist in Hong Kong with Barclays Capital. “The labor force as a whole is barely growing now,” says Stephen Green, head of Greater China research for Standard Chartered Bank in Hong Kong. As a result, Chinese policy makers “just don’t need to create as many jobs as they [once] did.”

What are they talking about? This:

Note the low “base”: China’s population in the 0-15 age group is relatively smaller than the population in “older” working-age brackets. It used to be that China’s growth could depend on factor accumulation – more people added to more capital equals high growth, without necessarily adding productivity to the mix. That’s the growth dynamic that helped other East Asian countries enjoy super-sized growth rates for over 30-40 years.

But like Singapore and Korea and Taiwan, when you get past that demographic transition stage, growth slows down for the simple reason that labour force growth is slowing down. Thirty years down the road, China’s growth will slow even further to the low single digit stage, as the population begins to resemble that of Japan. If you can get 2%-3% growth under those circumstances, you’d be doing pretty well.

Malaysia is “lucky” in the sense that we haven’t gotten that far yet – in fact, despite being a middle-income country, we still have the demographic profile of a low income economy. But trend growth has slowed in the past decade, not so much because of crises or middle income traps, but simply because our labour force growth has also slowed, though not to the extent of our higher income neighbours.

Will China’s slowing growth momentum affect Malaysia?  Absolutely, as our trade with China has grown leaps and bounds in the past ten years, to the point where China is now our number one trading partner.

China’s impact on the global economy has been profound and not always benign, from essentially capping inflation in goods prices (via low cost manufacturing), to being the underlying reason behind the commodity price boom, to artificially depressing long term interest rates (via recycling of international reserves), thus contributing to the Western world’s consumption and debt binge.

That role is evolving now, and you would expect to see all the above influences to start ebbing away. It’s been a great ride while it lasted, but its a brave new world we are entering now and old certainties will surely die away.