Positive demographic cycles have been one of the key components in the strong growth trends for a number of Asian countries. As Morgan Stanley note in their most recent ‘China Deleveraging’ discussion, the decline in the ratio of the non-working (elderly and children) to working-age (15-64 years) population has coincided with periods of economic boom for various countries in Asia in the past 50 years. But… as Nomura’s Richard Koo notes – having experienced the very same unstoppable shift in Japan – “demographics will cease to be a positive for China’s economic growth and start to have a negative impact.” Fundamentally, Koo adds, this means “the nation will grow old before it grows rich.” Demographics, capital accumulation and productivity are the three most important drivers of potential growth, and these three factors are intertwined to a certain extent. China has already entered its first stage of demographic challenge, with its GDP growth slowing on the back of all three contributors of growth. Given the lessons of Japan and the Asian Tigers, China is set to suffer notably from this demographic drag – and its entirely foreseeable.
Throughout the region, there has been a virtuous cycle of falling age dependencies (a rising share of the working age population), improving saving (and investment) to GDP and long phases of strong GDP growth. Japan was the first in Asia to experience a positive demographic wave, followed by the former Tiger economies (i.e., Hong Kong, Singapore, Taiwan and Korea) – and then China.
In 2011-15, China is undergoing the first stage of its demographic challenge, and going into 2016-20 the second stage of demographic challenge will kick in as we begin to see a decline in China’s working age population resulting in a rise in the age dependency ratio. In other words, the reversal in demographic trends in China will be more challenging than that in Japan and Korea, and this will place downward pressures on China’s potential growth and its near-term growth trajectory.
Source: Morgan Stanley