Standard Life Investments

Weekly Economic Briefing

Emerging Markets

Not ageing gracefully


There are few countries with a demographic outlook as challenging as China’s. A baby boom under Mao Zedong followed by 36 years of a one-child policy has created distortions that are reverberating both socially and economically. Most notably, China’s population is ageing rapidly. Compounding the issue, China has supported years of rapid economic growth through massive credit creation, a good portion of which will ultimately end up on the government’s balance sheet. Therefore, as China ages it will face increasing constraints on its spending priorities. This will have profound implications for both global growth and also geopolitics. As China faces lower structural growth it will have less space for fiscal stimulus, while at the same time it will confront the traditional ‘guns versus butter’ debate.

Rapid ageing Spending constraints

China is ageing more rapidly than almost any country in recent history. According to the UN, it will take China just 20 years for the proportion of the elderly population to double from 10 to 20% (2017-2037). The next closest is Japan where it took 23 years; by comparison it took 61 years in Germany and 64 years in Sweden. China’s dependency ratio for retirees (those aged 65 or older divided by total working population) as at 2015 was 14%; the UN estimates this could rise as high as 44% by 2050 (see Chart 10) with the number of those over 65 rising from approximately 100 million in 2005 to approximately 330 million in 2050. This rapid demographic shift will put significant financial strains on the government and force policymakers to re-evaluate spending. Currently the government plays a small role in elderly care, partly as a result of cultural norms as well as a lack of need. As at 2010, only 43% of elderly males and 13% of elderly females received any financial support from a pension. Additionally, there are approximately 27 beds at nursing homes for every 1,000 elderly people in 2015, far less than other countries with ageing populations. China is ageing at an earlier stage of development than almost any other country. As a result, China lacks many of the welfare capabilities that wealthier countries had during their demographic transitions.

Further complicating the picture is the rapid run-up in debt over the past eight years. Although ostensibly the public sector balance sheet looks relatively unlevered, when you include local government finance vehicles and other contingent liabilities, the augmented public debt load amounts to slightly over 60% of GDP according to the IMF (see Chart 11). This makes the Chinese public sector balance sheet one of the more indebted among its developing country peers. And due to the fact that the Chinese economy continues to rely on fiscal deficits in the range of 10% of GDP to maintain growth at the government’s target, this debt stock will continue to increase. China’s rising public debt and slowing growth will make reaching itstated goal of extending pension coverage to everyone, especially the hundreds of millions of migrant labourers with inadequate personal savings and no retirement coverage, very difficult. China still faces policy options, but few clear-cut choices. It could raise the retirement age, accept immigrants, transfer more state wealth into retirement instruments or cut spending on defence and national security. After decades of rapid growth and enviable demographics, policymakers face a hard adjustment.

Alex Wolf, EM Economist