China Financial Markets

A friend of mine sent me the following table. It comes from a paper presented at the September 2007 International Conference on the CCP’s 17th Congress by Daniel Xu and Ning Ding (“Distortion of Population Growth and Pressure on Employment”) and shows the number of people, in millions, entering the job market in China every year from 2006 to 2020. I assume this means the number of people turning 18.

This numbers at first were very surprising to me, but they are at least visually consistent with a graph derived from UN data of population by age cohort, which shows a significant bulge in children born in 1985-1990 and then a rather sharp falling off until 2005. Thereafter, give or take a few surges and retreats, births are expected to decline by just under one-half percent annually until 2050.

Before anyone blasts these projections as meaningless because it cannot be possible to project that far out into the future, let me say that my understanding is that immigration rates are tough to project (which is why it is hard to make projections about US population growth), but birth rates are much less difficult. In 1954, for example, the UN predicted that world population in 2000 would be 6.3 billion. In fact it was 6.1 billion – so they were able to project 46 years into the future with only a 3% error (and in fact much of their “error” came from their failure to predict that China would implement a one-child policy in the 1970s – a fairly unique factor that would have been hard to predict).

As I read these numbers, from 2006 to 2010 the number of young people joining the job market has grown or is projected to grow by 6.6% a year on average. From 2010 to 2020 the number of new job seekers is expected to decline on average by 5.8% a year. Remember that this is the growth rate of one part of the marginal change in the working population (the other part is the number of retirees), not the growth rate of the total working population, which will necessarily be lower in absolute terms.

These numbers seem plausible. I vaguely remember that last year a government report said that there would be 24 million people entering the job market and, I think, 4 million retiring. If we net out people of retirement age (I am using 65 as a proxy for retirement), the change in the positive growth of new entrants into the job market is less dramatic until 2009-2010, and then the negative growth rate is more dramatic thereafter. China still has a young population and so the number of retirees is currently small but is growing very dramatically every year, until roughly 2050, after which the number of people entering retirement is very high. Today about 7% of the population is 65 or older, but in 2050 about 23% will be over 65 (332 million people – by the way much more than the combined retired population of Europe, North America and Japan).

Until the 1960s China was among the youngest countries in the world, with a median age of 20. Today the median age is 33, and the UN projects it to be 45 by the middle of the century. By comparison the median age in the US is around 34, and is projected to be 41 by the year 2050, or a couple of years lower if we assume current immigration rates.

It is incredibly complicated to think about the economic implications of such dramatic demographic changes, but I think there are a couple of points that can be made:

¨ China currently needs extremely high growth rates – I think I agree with Xinxin Li’s suggestion of 10% annually – in order to keep the urban unemployment rate from rising, but this pressure will abate soon. After 2010 the number of young people joining the job market will begin to drop quickly, while the number of retirees will continue growing rapidly. The combination will reduce the need for job creation on the order of 1 million jobs or more a year for several years.

¨ In the short term this will be a good thing because it will allow China a little more room to maneuver on the jobs front and will create less pressure for breakneck growth. In the longer term of course it means that there will be a sharp drop in the number of people working – much sharper than the drop in overall population. That means workers will need higher levels of productivity to generate the same amount of per capita income.

¨ The rapid reduction in the number of young people and the rise in the number of older people are probably good for political stability.

Before ending this entry I wanted to throw in a few more numbers – not related to demographics, however. Yesterday I said that new loans had grown by a relatively low 15.7% in February year on year. Total new loans in February were RMB 243 billion. This compares with the huge RMB 804 billion net growth in new loans in January. It seems to me that there must have been some anticipation of February loans in the January numbers, although remember that every January we get a big number (though not this big) because of some left-over demand from the previous year.

Total new loans for the first two months of the year, then, amounted to RMB 1,047 billion. This is 83% of the first quarter quota of RMB 1.26 trillion and 29% of the total 2008 quota of RMB 3.60 trillion. I don’t think these quotas are going to last very long.

One last thing: I saw that according to the New York Times the CEO of Blackstone received $350 million in compensation in 2007. I hope that doesn’t become too widely known in China.