China population: what’s driving central bank concern about the nation’s ageing workforce?
- The People’s Bank of China (PBOC) has been increasingly vocal about the potential economic consequences associated with the country’s demographic challenges
- Chief among its concerns are how China’s declining fertility rate and ageing population will weigh on the pension system and productivity
A pension deficit and looming debt crisis driven by a rapidly greying population. That’s the nightmare scenario for Chinese authorities, including the nation’s central bank, who are increasingly worried about the financial implications of the country’s demographic challenges.Official concern about the country’s population problems was highlighted by the People’s Bank of China (PBOC) in an unusually frank
research paper published last week.
The PBOC warned China had only about a decade left to enjoy the benefits of its large working age population, which has helped propel growth over the past four decades.
Authorities should “fully liberalise and encourage” childbirth to offset the economic effects of a falling fertility rate and ageing, warning “the pay as you go pension system can hardly cope with the ageing crisis”, the central bank said.
The comments foreshadow worry about the results of the seventh national population census, which are expected to show a fast-evolving
demographic crisis
facing the country when they are released late April.
Amid the heightened concern, analysts are anticipating new measures to address China’s demographic challenges, including the launch of more retirement plans.
Beijing announced last week the monthly pension of its 120 million urban retirees would be raised 4.5 per cent on average this year, the 17th annual rise in a row. The monthly pension for about 160 million senior farmers, which averages about 170 yuan (US$26), is also expected to increase.
Authorities maintain there is adequate cash to cover the growing number of pensions. The national social security fund registered a reserve of about 6 trillion yuan (US$922.8 billion) last year.
But some researchers point to a huge financial black hole in the foreseeable future.
The Chinese Academy of Social Sciences (CASS) estimated in a 2019 report the pension reserve will run out by 2035 and the deficit could swell to 11 trillion yuan by 2050.
Some provinces with shrinking populations and slow economic growth, such as the northeastern province of Heilongjiang, have already reported pension shortfalls, forcing authorities to establish a national pool and cross-province allocation to guarantee timely payment.
The central bank is not at the forefront of fighting China’s demographic problem. Population policy is overseen by the National Health Commission, retirement is supervised by the Ministry of Human Resource and Social Security, and the Ministry of Finance is responsible for managing the national social security fund.
But given the financial risks, the PBOC is taking increasing interest.
On Tuesday, PBOC deputy governor Li Bo said at a Boao Forum for Asia panel discussion that China has “many resources” at its disposal to meet its retirement challenge. Li proposed using state capital, proceeds from the sale of state-owned land and even the issuance of 50-year Treasury bonds to solve the funding gap.
Some of the measures are already under way. State-owned enterprises have transferred 1.68 trillion yuan of capital to the national social security fund in the past three years.
Ding Shuang, chief Greater China economist at Standard Chartered Bank, said ageing posed no short-term threat to China’s monetary policy, but the central bank’s interest signalled concern over how falling fertility rates and an ageing workforce could dampen economic vigour and ratchet up government debt, a problem that Japan has faced over the past few decades.
“It’s indeed an important issue, but it has no direct connection with monetary policy. At most, it reflects the broad interest and flexibility of central bank research,” he said.
Compared to the zero interest rate policy used by the Bank of Japan over the past two decades, the PBOC has vowed “normal” rates and a scaling back of its stimulus as the
Chinese economy recovers from the coronavirus shock.
A fall in productivity due to demographic issues could be an obstacle for China’s target to double the size of the economy by 2035, which requires annual growth of at least 4.5 per cent over the next 15 years.
The PBOC research paper echoed recent comments by former central bank governor Zhou Xiaochuan, who argued China must switch away from a defined contribution pension plan, in which employees contribute the bulk of money, for the sake of financial sustainability and long-term productivity.
Last month, the central bank appointed a labour economist to advise on its monetary policy, the first outside voice since 1997.
Cai Fang, deputy president of CASS, said early this month China had reached its Lewis turning point, or the decline of the working age labour force, in 2010, putting an end to decades of double-digit growth. He was now warning of a “second turning point”.
“China’s population could peak before 2025,” he told an event organised by
Caijing Magazine a week ago. “The new [turning point] could cause growth to plunge and lead to insufficient demand. It would generate an unfavourable impact on our push for consumption.”
China’s gross domestic product (GDP) growth slowed to 6.0 per cent in 2019 – before the economy was ravaged by the coronavirus pandemic – from 10.6 per cent a decade ago.
Beijing announced in its
new five-year plan for 2021-25
it would extend the retirement age, which is 60 for men and 50 for most women.
The CASS figures show the size of
China’s pension system
was 11.6 trillion yuan in 2019, equivalent to roughly 11.7 per cent of its GDP. The proportion was far lower than the OECD average of 49.7 per cent.
About three quarters of pension plans are from government-backed schemes, while the private contribution plans are just debuting.
China’s central bank has been increasingly vocal about the economic consequences associated with the nation’s demographic challenges, making note of the potential effects on the pension system and productivity.
www.scmp.com
