Sunday, August 02, 2009

Yahoo News: China is rich abroad because of worker bulge

From Yahoo News on 2 Aug 2009:

GENEVA (AFP) - – China can finance the US economy because its workforce is large relative to children and old people, a new analysis suggests, trying to solve a mystery why Beijing is a major net creditor rather than a borrower as emerging economies usually are.

And this strong ratio of workers to dependants is set to last for at least 15 years 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 Guonan Ma and Zhou Haiwen 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, holding huge amounts of US government debt, casts surprising light on an issue at the heart of long-standing tension between the United States 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 "sterilising" 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 United States, 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.

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 personal research from the Ma and Haiwen 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, and 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.

A net debtor in 1999, China has since become a major net creditor and is likely to remain so until 2025, according to the study.

The country's "net foreign asset position (NFA)," the difference between its overseas assets and liabilities, came to 30 percent of its gross domestic product in 2007 and amounted to more than 1.0 trillion dollars.

In absolute terms, its NFA status was second only to that of Japan.

The authors of the study describe the turnaround in China's external financial situation as "puzzling," given its relatively low per capita income level, 2,500 dollars, and its sizzling growth of recent years.

"A faster growing economy tends to attract more capital inflows," the report noted, adding that "by conventional wisdom China should ... be a significant importer of foreign savings."

But that is not what has happened, the report contends, largely because the Chinese are zealous savers rather than consumers of foreign goods.

And those savings are increasingly being invested abroad, notably in the United States, where Chinese holdings in US Treasury bonds now amount to more than 800 billion dollars.

"Given China's growing role in the global financial system, the stakes are high, not only for China but for the rest of the world," the authors contend.

In 1985, according to the study, for every 100 people in work, just over 45 children aged under 15 were dependent on them. By 2005, 100 workers were supporting slightly fewer than 15 youngsters.

A reduced obligation to meet the youth-related needs, the report said, should boost overall savings and drive net capital outflow.

"This is because a lower youth dependency could lead to reduced investment in housing, schools and hospitals."

China's overall dependency ratio, expressed as all children under 15 plus pensioners over 65 divided by all workers in between, is also falling.

The labour force in China has in effect been growing faster than the population that depends on it, further strengthening savings.

The study found that China's overall dependency fell from 55 percent in 1985 to 38 percent in 2007.

A declining dependency ratio tends to lift household savings rates while increasing the labour supply, thereby acting as a constraint on wage rises. Government savings are also enhanced as less money is spent on health care and pensions.

The report also pointed to a reduction of Chinese government debt, which hit a peak of 30 percent of output in 2002. It noted that conversely, a rise in official debt would tend to reduce domestic savings and increase foreign borrowing.

While Beijing is on course to remain a net creditor until 2025, youth dependency is unlikely to fall further and so "may thus cease to be a main driver" of China's external financial position.

But the old-age dependency ratio is also forecast to double to 20 percent in the next 15 years, cutting spare funds for investment abroad.

China's foreign asset position "is expected to adjust gradually, facilitated by continued strong economic growth and a more flexible renminbi (the Chinese currency)."

And "this should assist an orderly global rebalancing without creating excess stress on the rest of the world during the transition."

In summary, China has a lot of active workers and few young and old people. As a result, China does not have to spend a lot of money on social welfare (medical care for the retirees and schools for children) and is able to save a lot of money. As a result, it is a net saver. The Chinese savings are then used to invest in its own economic development. In fact, China has so much savings that it has to send some of it to the US.

Does that remind of you of another country in another time? Well, Singapore was like that in the eighties and nineties. The birth rate then fell below replacement level and the number of retirees was small relative to the working population. At that stage of our economic development, we had a lot of active workers and few dependents. The savings were plentiful and effectively confiscated by CPF which were then reinvested in the local economy. I do not wish to comment on how efficiently they were invested but you may ask the economist Alwyn Young what he thinks.

Fast forward today to the 21st century. We no longer have a bulge in the over-15 and under-65 part of the population. The bulge is slowly moving up. We have even fewer children but an ever increasing population of retirees. Sooner or later, the country will become a net consumer and the time to pay the demographic piper will come. What does that mean? Well, for starters, the funds available to Temasek Holdings and other investment agencies will gradually decrease. In fact, it won't be just Temasek Holdings. Our banks will see a fall in deposits as retirees start to draw down on their savings.

This spells trouble for our model of economic growth which has been largely financed by cheap plentiful savings by Singaporean workers. The solution? The government imports more foreign workers and grant more PRs and citizenships (to capture their savings in CPF). To stem the potential haemorrhage from CPF withdrawals, they have raised the withdrawal age as well as implemented a plethora of schemes to restrict withdrawal.

Did you really think that they did all that to help you plan for your retirement?

The tougher and more sustainable solution would have been to increase our birth rate to raise the future pool of local workers. That would require a rethink of our policy on social welfare. It is perfectly achievable but that would probably necessitate European-level subsidies which in turn would mean raising taxes. But you see, few in the government have the courage to challenge the prevailing policy of growth at all cost. When you have million-dollar salaries that depend on annual GDP figures, you can throw long term policy shifts out of the window.

I despair for the long term future of Singapore.


takchek said...

Singapore will probably re-join Malaysia by then.

Fox said...

We'll probably move our retirees to Batam.