Why China Will Grow Rich Before It Grows Old

Claims by those such as Financial Times writer David Pilling that “the song of China’s miracle has a three-word refrain: Just add people” are therefore absolute nonsense. Only 4 percent of China’s growth came from “adding people,” while 96 percent came from other factors.

This does not mean no economic problems are created by China’s aging population. But these come from a completely different route than shortage of labor. The real economic difficulty China faces with regard to population is that people in work can save, while those not working, because they are too young or too old, generally do not save. The decline in the percentage of China’s population in work therefore tends to lower China’s household savings rate. As investment necessarily has to be financed by savings, this puts downward pressure on China’s investment rate, and as investment is the main source of economic growth, not only in China but in most economies, this could lower China’s economic growth. While the decline in China’s working-age population does not pose a risk of significant economic slowdown due to lack of labor, it could cause a problem due to the fall in savings.

But fortunately households are only one of three sources of savings. Of the other two, government savings are small in almost all countries, and usually negative. But company profits are the biggest source of savings in China. If savings via company profits were to increase, this could compensate for any decline in household savings due to the fall in the percentage of the population that is working.

Maintaining high growth in China therefore depends more on maintaining company profitability than it does on population. A decline in company profitability is a much more serious threat to China’s growth than any demographic factor. A rise in company profitability, through its effect in raising company savings, would be a far more powerful factor in maintaining China’s economic growth than relaxing the one-child policy.

In summary, the claim that China faces a significant slowing of its economy due to population factors, and therefore that China will “grow old before it grows rich,” is a typical example of myths created by engaging in woolly rhetoric without using numbers. Increases in labor supply play such a small role in China’s economic growth that the end of the rise in the working-age population will have only a very small effect in reducing China’s growth rate. It is what happens to China’s productivity, and above all its investment, that will overwhelmingly determine its economic growth and therefore its prosperity. Provided the correct policies are pursued, China will certainly become rich before it becomes old.