MERICS Economic Indicators Q1/2019
Stable economic growth in China: Government support prevents slowdown
Government intervention helped prop up growth in China’s economy and prevent a further fall, but the stability remains fragile. GDP growth in the first quarter of 2019 was 6.4 percent, unchanged from the previous quarter. Some macroeconomic indicators including industrial production, retail sales and stock market indices have shown signs of improvement.
Reports that a trade deal with the US is in reach have also contributed to lifting the mood. But the optimism is tainted by a drop in industrial profits and increasing reports of layoffs in the private sector. Weak import data are another sign of weak domestic demand. It is a reminder that there is still much uncertainty on the horizon for 2019. Maintaining its vigilance toward further threats to growth, the government has announced a raft of additional support measures.
The MERICS China Confidence Index measures households’ and businesses’ confidence in future income and revenues. The index is weighted between household and business indicators. It includes the following indicators: stock market turnover, future income confidence, international air travel, new manufacturing orders, new business in the service sector, urban households’ house purchase plans, venture capital investments, private fixed asset investments and households’ consumption share of disposable income. All components have been tested for trends and seasonality. The MCCI was first developed in Q1 2017.
Efforts to reduce financial risk are not to be rolled back yet, but credit growth and money supply have picked up in the first quarter. At the same time the financial system has seen increasing numbers of non-performing loans and defaults. If credit allocation is not improved, further government stimulus measures could worsen the situation in the financial system.
Restraints on infrastructure spending by provincial governments have been relaxed. New rail projects and major regional developments in the Greater Bay Area as well as Xiong’an have been kicked off. But the government is aware that massive new infrastructure spending will not be enough and could even prove damaging to gains made to control risk in the financial system.
To ensure the stimulus is put to more productive use, emphasis has been put on improving the business environment by reducing taxes, red tape, and providing small business better access to credit. These efforts aim to boost investment and consumption by private companies and households.
The government is also seeking foreign investment to support the economy. It has announced a further opening up of the market, made changes to the foreign investment law and introduced improvements to IPR protection. This is partly in response to increasing pressure from the US and EU. But it is also due to the fact that China needs continued investment from foreign companies. Further steps toward incremental opening can be expected in 2019.
Looking ahead, a sharp slowdown in GDP growth is not likely, but the economy remains on a weak footing. The government is trying carefully to balance progress made in reducing risks in the financial sector with maintaining stable growth. Should growth continue to show signs of weakness, more expansionary policies can be expected.
Focus topic: Is ageing China facing a Japanese-style “lost decade”?
By Lauren A. Johnston
Before we write off China’s economic dynamism for a decade, we should consider the significant ways in which it differs from Japan. Differences in the timing of demographic change in two countries in particular suggests that China’s experience will not mimic Japan’s. With appropriately targeted polices, China will avoid a “lost decade”.
China’s leaders have recently set a growth target for 2019 of 6 -6.5%, marginally lower than the target of 2018. Intensifying population ageing is one factor attributed to fears of an emerging Chinese ‘lost decade’, akin to Japan from the mid-1990s. The comparison is especially worrying in that like Japan then China today sits mid a trade war with its most important economic partner, the United States. Lesser obviously, like Japan then, China sits a few years past its peak workforce population share (Figure 1).
Population ageing and the economy
An ageing population poses many economic challenges: rising labor scarcity in sectors and regions where labor was once bountiful; fiscal and corporate resources increasingly directed towards pensions; more human capital directed toward caring for the old. In other words, national resources are diverted away from more productive economic endeavors.
Demographers use several different definitions for population ageing onset. China passed all the leading such indicators between 1987 and 2002. China’s workforce population share has meantime been in decline since around 2011 (Figure 1) when the workforce peaked at some 925 million workers. Despite the onset of later stage demographic transition, however, China’s per capita income remains that of just a middle-income country.
Although China is old before it is rich, it hence retains convergence growth potential. GDP is still growing at some 6% annually (Figure 2). This means the resource envelope available to households and the government is also growing at a relatively fast rate.
Japan, on the other hand, was already an advanced industrial economy when its population ageing intensified, amid a more established slower, steady state growth rate.
China experiencing demographic transition as a developing country in turn means the economic impact of population ageing is likely to be different to the Japanese case.
Ageing in developed Japan vs developing China
Digging into the demographic data reveals other key differences. Whereas in Japan the older cohort dominated the economic agenda through their adulthood, in China the older generation have never – not even in their prime – been important drivers of consumption. Just as China puts greater emphasis on consumption as a new growth engine, it meets a newly enriched, higher-spending younger consumer class for whom a more affluent level of consumption has been a relatively norm from the get go. In Japan, in contrast, the lost-decades younger cohort feels less economically prosperous than the older population segment.
In the same way, when the older Chinese generation leaves the workforce the impact will be different. Unlike in Japan where the education gap between generations is narrow and the human capital embodied in the older cohort deep, in China human capital is dramatically skewed in favor of the young. The lower fertility rate from the 1970s combined with rising household and national incomes means that over recent decades dramatically more resources have been invested in each child’s education. As China’s population share of workers falls, just maintaining output per capita requires improved productivity per capita. China’s younger cohort, at least theoretically, are well-positioned to utilize their relative skills to maintain, if not increase, productivity levels.
Finally, China’s dependency ratio, as measured by the ratio of youth (<15 years) and elderly dependents (>64 years) over the total working population (aged 15 to 64) will remain lower than Japan’s for some years to come. Both countries have persistent below replacement level fertility, but Japan’s demographic transition process began earlier and so the trends are more established. Japan moreover, has one of the longest life expectancies in the world, and is already home to some 70,000 centenarians, ranking it among a handful of super-aged societies.
Ageing with Chinese characteristics
China may not be facing a “lost decade” akin earlier Japan, but it nonetheless must overcome its own challenges. As a developing country, it still retains pockets of poverty. Eradicating these requires consuming fiscal resources. It also awaits to be seen if the younger cohort are sufficiently educated to realize elevated national per capita productivity.
Pension sustainability is also a major challenge. The 2019 Work Report promised to reform the management of aged-care insurance funds and guaranteed the payment of pensions on time and in full. In March, the Ministry of Finance transferred a nearly 7% stake in the People’s Insurance Company of China into the state pension fund. This is one step in what is expected to be a standard pattern as China sets aside assets to cover its emerging pension-related liabilities. New opportunities in the sector are also emerging for foreign investors.
Avoiding the downward pull of an ageing population will not be easy. In April China’s State Council released a set of Opinions on promoting the development of pension services, which set out 28 policy proposals for addressing a breadth of issues presently or imminently expected to affect ‘ageing’ China.
There are grounds for hope that, given the right policies, China will not suffer Japan’s recent fate. Whether it succeeds or not otherwise, only time will tell.
This focus piece is based on Johnston, L.A. (forthcoming). The Economic Demography Transition: Is China’s “not rich, first old” circumstance a barrier to growth? Australian Economic Review (to be published in a 2019 issue).