Mon, Aug 03, 2009 - Page 11 News List

Demographics boosting China

DEFYING THEORY: China is a net exporter of capital, which confounds the theoretical assumption that an emerging economy must be a net importer of credit


Chinese Vice Premier Wang Qishan, left, and Zhou Xiaochuan, governor of the People’s Bank of China, speak before meeting with US Federal Reserve Chairman Ben Bernanke in Washington last Wednesday. Policymakers from the US and China pledged to keep their stimulus efforts in place until an economic recovery is secured.


China can finance the US economy because its workforce is large relative to children and old people, a new analysis suggests in an attempt to solve a mystery why Beijing is a major net creditor rather than a borrower as emerging economies usually are.

This strong ratio of workers to dependents is set to last for at least 15 years, the study says, although the net benefit for China will decline as the burden of old people creeps up while the cost of children remains steady.

The personal research by economists writing in a publication of the Basel-based Bank for International Settlements also implies that the workforce is skewed, with young people who have left a child-bulge bracket up to the age of 15 now boosting the workforce.

And they are saving money substantially.

Economists Ma Guonan (馬國南) and Zhou Haiwen (周海文) argue that China’s savings glut can in part be explained by its low “youth dependency ratio,” that is, the ratio of those below the age of 15 to the working age population.

A country’s “old-age dependency ratio,” by contrast, compares the percentage of pensioners over 65 to the work force.

“One striking feature of China’s demographic transition during 1985-2007 is that its youth dependency ratio fell by half while its old-age dependency increased only slightly, leaving the overall dependence unchanged,” the report said.

The suggestion that demographics are a hidden key to why China is able to buy assets around the world while holding huge amounts of US government debt casts surprising light on an issue at the heart of long-standing tension between the US and China.

It also gives a new perspective to the view long held by many economists that so-called global imbalances, principally the US trade deficit with China matched by import earnings for China, would be a factor leading to a crisis of the kind the world is now experiencing.

The conventional view is that the massive Chinese investment abroad is a way of “sterilizing” the country’s huge earnings from exports or preventing them from causing inflation and driving up the yuan. The export surpluses are an undisputed fact; however, the new research suggests that they are not the only big source of surplus funding available to China.

For the US, struggling to spark a recovery, the stakes are high, a point apparently driven home by senior US officials during talks in Washington last week with Chinese Vice Premier Wang Qishan (王岐山).

US Treasury Secretary Timothy Geithner urged China to shift its economy away from exports and toward domestic demand to strengthen the ailing global economy. He was in essence asking the Chinese to save less and import more.

The research by Ma and Zhou offers insights into why China has funds to invest abroad and points to a high ratio of personal savings and a reduction of government borrowing as important factors.

These, they say, are driven by demographics and enable the emerging Chinese powerhouse to export capital instead of importing it, thereby defying classical economic theory.


With a relatively low percentage of the population under 15, the Chinese government is freed from having to spend vast sums on child-related services and can go abroad in search of securities and companies to buy, according to this analysis.

The BIS, known as the central bankers’ central bank, circulated the report last week, adding that the arguments developed by the authors do not necessarily reflect those of the bank.

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