China’s housing boom is on shifting demographic sands

China need only look to Japan to see how demographic pressures can drag down economic powerhouses. But unlike Japan, there's a danger China might become old before it becomes rich.

Japanese health minister Chikara Sakaguchi said rather melodramatically in 2002 that "if we go on this way, the Japanese race will become extinct", referring to the country’s exceedingly low birth rate and rapidly ageing society.

Japan’s fertility rate dropped below 2.1 -- the replacement level needed to maintain the population -- in the 1980s. It averaged between 1.27 between 2005 and 2010. Under the most pessimistic scenario, Japan’s population would drop to only 45 million at the end of this century, the same as in 1910 Meiji Japan.

The population decline in Japan is also one of the key contributing factors to the country’s economic decline since the 1990s. This cautionary tale weighs heavily on the mind of China’s top executive from the property sector Mao Daqing, who is the deputy chief executive of Vanke, China’s largest property developer.

Mao’s recent speech about the frothy Chinese property sector is still sending shock waves across the country.  China Spectator has covered his leaked speech at a closed door discussion forum last week (What keeps China’s biggest property developer up at night, May 7; Alarm bells are ringing on China’s property bubble, May 9).

Today’s column will examine Mao’s concern about two headwinds against the sector and the Chinese economy more broadly in medium to long term. 

Vanke has been looking at China’s demographic change for the last year on the behalf of the central government. The research results as revealed by Mao in the leaked speech are scary, to say at the least.     

Between 2028 and 2033, Chinese citizens older than 60 years would number between 390 million and 440 million. In addition to that, the country would also need to look after another 270 million people. That number includes 40 million disabled and 230 million underage people.

What it means is that in less than 16 years time, the country’s 700 million working-age people need to support roughly the same number of old, young and disabled people. By way of comparison, more than 900 million working-age Chinese are looking after 500 million people today. And that is going to change dramatically in the next two decades.

What does it mean for the Chinese economy? It simply means that the number of jobs will shrink, the country has to take on more debt, innovation will suffer and mobility within corporations is also set to decline.  There is no better example of this than Japan, the once-vibrant economic power house that has been weighed down by its greying population.

However, China would be lucky to be in Japan’s situation. There is a real danger that China may become old before it gets rich. Though Japan is marching into its third lost decade, the living standard has hardly suffered in the country. A British MP said while visiting Japan: "If this is recession, I want one."

"Japan’s economic structure back then is much better than today’s China. According to our economic model, it is almost impossible to imagine the growth in 2030’s GDP would be based on technological innovation. If that is not the case, the country would be in a lot of trouble," Mao said, according to the leaked transcript of his controversial speech.

He says the Chinese property sector will reach its upper ceiling within the next 18 years.

Mao was also critical of China’s loose monetary policy and especially under the administration of Hu Jintao and Wen Jiabao, who led China before Xi Jinping and Li Kiqiang took it over last year. He said China’s economic growth for the last decade or longer was based on credit expansion.

A lot of that money has flown into property sector and building infrastructure. Though property developers have benefitted greatly from loose monetary policy, it is not healthy for the development of the country’s economy.

"Everyone seems to be hazy and a bit like the after-effect of taking drugs. It is very hard to get rid of that addiction. Consequently, people need more money and more stimulation and are feeding land-revenue based local finance," he said.

Mao is critical of Chinese economists who are more or less wedded to the idea that there is a lot of headroom for the Chinese GDP to grow due to the need to invest in infrastructure. But the country's fundamental problem is precisely its excessive investment in fixed assets and infrastructure.

From a perspective of efficiency of investment, putting money into infrastructure is the worst possible option. However, if you invest all these money into private enterprises and innovative companies, the situation will be much more different, says Mao. Though the government is tightening credit supply, it is not clear if the government is channelling the money into the right area.

Analysts calculate that if state-owned enterprises can bring their level of efficiency and productivity to that of their private counterparts, China’s GDP could add another two per cent. That means an additional 11 trillion yuan or $1.9 trillion, which is larger than Australia’s GDP.  

However, the silver lining to Mao’s gloomy outlook is the apparent determination of the Chinese leadership to break away from the old business model.

"I personally believe they are saying goodbye to the policy practices of the last decade or longer from both economic and political reform perspectives," Mao said.  

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