Ichiro Suzuki China’s population has been aging fast, and this is widely known. If there is any surprise in this, it is aging faster than initially expected. In fact, the population may have already peaked out by now. China’s birth rate has dropped sharply since the Communist Party eased the infamous ‘one child policy’ in late 2015, due to ever-rising costs of raising a child and COVID-19 more recently. Its peak is forecasted in 2022 or 2023, only 7 years after its working age population has peaked out, and only 14 years after Japan’s population hit its peak. Population growth is one of the critical factors to drive economic growth along with productivity growth. Stalled population growth, therefore, could stand in the way of China’s pursuit to catch up with and overtake the U.S. as the largest economy on earth.
To begin with, there will be fewer consumers as the population begins to fall. At factories, more robots are going to be deployed on production lines in response to fewer workers available. However, little can be done on the demand side. Fewer consumers are going to weight on sales of everything in the long run: cars, clothes, gadgets, food, alcohol beverages, etc. Among all the items associated with consumer demand, nothing is going to have a greater macro impact than housing, which has been one of the major drivers of the Chinese economies over the last few decades. The housing market is set to be affected immediately by fewer home buyers. In fact, the house purchase population of 25-34 years old cohort has already peaked out in 2017 at 270 million. This age group is forecasted to fall to 200 million by the turn of the next century. For a while, a sharp fall of first time buyers is going to be mitigated by a large number of super rich people who are willing to step in to buy on any meaningful house price corrections. There are 9 million people in the top 1% bracket, with average household net worth of RMB 50 million (approximately $7 million). Another 80 million people are in the top 1-10% bracket and they have net worth of RMB 10 million. They are cash rich and are going to be willing buyers of houses on a dip. (Never mind that this way of maintaining stable high-end house prices runs counter to ‘common prosperity’.) Nonetheless, even these people could choose to wait for lower prices if they expect a protracted housing market slump. Not all segments of the housing market interest these super rich people, of course. Only a fraction of the market does. These people care only about the top end and the more middle class-oriented segment for 25-34 years olds could suffer not so modest declines, with no new significant players to step in on a dip. In addition, fewer first time buyers translate to equally fewer home owners who would upgrade in the future. Japan has been a forerunner in aging population by about a generation ahead of China. New housing starts peaked in Japan in 1990 at 1.7 million units, the falling all the way down to 850,000 in 2021 for an exactly 50% decline. While pricey new high-rise condos at the waterfront areas in Tokyo evaporate instantly as their sales begin, a bigger picture that surrounds the housing industry is grim, with a meaningful effect on the macro economy. Large scale apartment complexes built in the suburbs in Japan’s super normal growth era half a century ago, are becoming hollowed out. Young couples who moved into these complexes decades ago have been retired for some time with modest pensions. Their children moved out of there long, long time ago. Then they pass away, leaving no one to live there. Such units are then sold in the market but do not fetch good prices, with adverse effects on the community. Some of these people die a solitary death, not to be found until a few days later or worse. The same thing has been happening at stand-alone houses, too. Dilapidated, vacant houses are creating a big headache for city officials. In 2018, 3.5 million houses in Japan were vacant, approximately 14% of total. As aging of population progresses, the same problem would hit Chinese cities, especially in third-rated cities if not Beijing and Shanghai. On the supply side other than fewer workers, aging of populations leads to lower savings rates. Retired people, without income except modest pensions, draw down from savings they accumulated in their working years. Investment-driven growth in China until recently has been made possible by high savings rates. Unsure of welfare they would receive after retirement, Chinese workers aggressively built savings on which they could live on in the future. This savings base was a low cost source of funding big infrastructure products and city developments. Now people have reached a point of drawing down from their savings pool. The Chinese economy has already pushed its dependence on investments to the point it cannot go higher in the face of falling rates of return. It is going to fall due also to less abundance of savings as source of funds. Falling rates of returns are going to entice a smaller amount of foreign direct investments that once flooded the Chinese economy in the early years of the 21st century. At the beginning of the 1990s when Japan’s working age population peaked out, the country was at the pinnacle of prosperity, with per capita income exceeding that of the United States. Working age population decline began to hit the economy from that stretched position, exerting meaningful downward pressure on economic growth, along with a crippled banking system and lost competitiveness of manufacturing industries. In contrast, population in China peaks out at a point the country aims to exit the middle-income country bracket. There can be a lot of room left to catch up, and the Communist Party is counting on it. Nevertheless, absence of population growth directly hits the size of the economy, over a very long period of time. In the process of reaching where it stands today, the Chinese economy relied too excessively on investments and debt-financing in all of public, private and household sectors. From this perspective, the Chinese economy is already quite stretched. It remains to be seen how all these factors play out, but the economy’s picture may not going to be as rosy as what President Xi would like to draw.
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.