China risks a Japanese-style generation of economic stagnation if it fails to adopt reforms to compensate for the ageing and shrinking of its workforce, which will push up wages and herald the end of the era of cheap Chinese labor, said Cai Fang (蔡昉), director of the Chinese Academy of Social Sciences’ institute of population and labor economics and a National People’s Congress legislator.
The only answer is to change China’s growth model from one focused on cheap labor and capital to one based on innovation and productivity, he said.
“China’s demographic dividend is set to disappear soon,” Cai said in a recent interview at his central Beijing office. “At that point, the high-growth model will become invalid as the source is gone.”
With the structure of China’s 1.35 billion population increasingly resembling a demographer’s nightmare — rapidly ageing with too few babies born — the hitherto potent economic combination of a plentiful supply of adult workers with few dependents could turn on its head.
Chinese government statistics show that the proportion of the population aged between 15 and 64 fell to 74.4 percent last year, the first fall in a decade.
“Japan’s demographic dividend disappeared in 1990, and the Japanese economy has stagnated ever since,” Cai said.
“China has to improve productivity. If it can’t, then there will be visible economic slowdown — in Japan, growth has stagnated below 1 percent for two decades; in China, a growth rate of 4 percent would be stagnation,” he warned.
He said companies, not government officials, should take the lead in looking for new growth sources. If Beijing can resist the urge to intervene, China may find new advantages through the “destructive creation” of the marketplace.
Cai said government officials at both a central and local level sometimes got in the way of that process.
“In past years China’s potential growth rate has become lower, though the actual growth rates were high, simply because of heavy government intervention — that’s absolutely unsustainable,” he said.
Steadily rising wages — up in double digit percentages for years and expected to stay that way for the foreseeable future — is one sign of China’s labor challenges.
There has also been a stream of media reports of factory owners and even provincial members of the Chinese Communist Party, desperately trying to woo workers with pay hikes, free accommodation and even all-expenses-paid weekend breaks.
“Total factory productivity used to be a completely foreign word for Chinese local cadres, but now some of them are even trying to use that as a performance assessment benchmark,” Cai said.