Thursday, May 7, 2009

For China, an Ominous Touch of Gray

As if Chinese policy makers did not have enough on their plate, they will soon have to grapple with the unprecedented challenge of a country that is growing old before it gets rich.

Many countries are turning gray, but Western experts are worried that Beijing is unprepared for the speed at which its citizens will age: U.N. projections say the population of working-age citizens in China will peak in 2015 and plunge by 23 percent by 2050.

By then, there will be 438 million Chinese 60 or older, or 61 people older than 60 for every 100 adults of working age, up from just 16 in 2005.

A report released last week by the Center for Strategic and International Studies says the economic and social stakes are so high that China's leaders, though in the midst of a financial crisis, cannot afford to delay policy changes.

"How China navigates its coming demographic transformation will go a long way toward determining whether it achieves its aspiration of becoming a prosperous and stable developed country with an expanding role in the global economic and political order," the center's study said.

Its core concern is China's rudimentary pension system, which is characterized by vast unfunded liabilities, empty accounts and low coverage.

As the center's report notes, the developed nations of today were all affluent welfare states by the time they aged. By contrast, China is still a poor country that has not had the time to accumulate the wealth needed to pay for comprehensive retirement protection.

Just 31 percent of the Chinese work force, mainly in the state sector, receives public pensions. Most of the fast-growing private sector is excluded, as are migrant workers. As for rural China, pensions are virtually nonexistent.

So hundreds of millions of elderly citizens will have to fall back on their shrinking families just as the increase to growth and incomes from an expanding labor force goes into reverse.

In the 30 years since China embarked on economic reforms, the growth of its labor force has added 1.8 percentage points a year to gross domestic product growth.

By the 2030s, in contrast, the shrinkage of its working-age population will be lopping 0.7 points a year off growth, according to the center's projections.

Many protests in China are started by unpaid pensions, and the center said that without an effective retirement policy, the social stability could eventually be undermined.

"Not just a retirement crisis, but also a more general social and economic crisis may loom in China's future," the report said.

More broadly, rapid aging will threaten China's hegemony in low-end manufacturing by pushing up labor costs, economists say. Vietnam's demographic turning point will not come until 2025, and India's working-age population will not peak until 2040, so both should enjoy a growing cost advantage over China in labor-intensive sectors.

The Communist Party is aware of the challenges and is guiding pension policy in the right direction.

Reforms have strengthened the basic pension system; enterprise annuities — similar to the 401(k) retirement plans in the United States — are growing quickly; a basic rural pension is to be in place by 2020; and the National Social Security Fund, set up in 2000 to backstop underfunded provincial pension plans, now has assets of about $80 billion.

But Stuart Leckie, chairman of Stirling Finance, a Hong Kong pension consultancy, said the issues needed to rise to the top of Beijing's political agenda.

"China really is in a race against time. It is doing the right thing overall, but it needs to do them faster and it needs to do them better," he said.

Compounding the policy challenge is another striking feature of China's demographic profile — an unbalanced sex ratio that ensures men will outnumber women for years to come.

A new study in the British Medical Journal found that there were more than 32.7 million more males than females younger than 20 in China, because the spread of low-cost ultrasound tests and abortions had reinforced the traditional preference for boys.

Countries typically record between 103 and 107 male births for every 100 females. But in Chinese towns in 2005, there were 124 boys 1 to 4 years old for every 100 girls. The figure rose to 126 in rural China and topped 140 in Henan and Jiangxi Provinces, according to the journal.

The potential repercussions of this imbalance, accentuated by the one-child policy in the nation, are grave. "What we know from other societies that have been male-dominated is that they either emigrate or they fight," Mr. Leckie said.

Yet in China the number of excess males is too great for the problem to be solved by emigration, he added. "So this is undoubtedly going to be a real social issue."

Economically, the impact is already being felt.
China International Capital Corp., an investment bank, says its studies show that provinces with a big imbalance consume less. This is because the competition for brides in rural China forces the parents of young men to help them buy houses early and to save up for betrothal gifts.
The root cause of this behavior is that parents, in the absence of a strong welfare safety net, look to sons to take care of them in their old age.

"Unless China sets up a much-improved rural social security network and medical care insurance system, we believe the rural sex ratio imbalance may deteriorate and continue to constrain rural consumption," China International Capital's economists said in a recent report.
The Center for Strategic and International Studies said that even more worrisome than the shortage of brides today will be the shortage of daughters-in-law tomorrow; for while the son is responsible for looking after his aging parents, it is his wife who provides the care.

All the more reason, the center concludes, for China to create a program for old-age income support, financed out of general tax revenues, and to build a national, fully portable system of funded retirement accounts.

By Alan Wheatley ,a Reuters columnist.

Source:http://www.nytimes.com/2009/04/28/business/global/28inside.html?_r=1

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