Without doubt, the People’s Bank of China (PBoC) has been very active with its fresh attempt to stimulate the sluggish economy. However, monetary policy should not be regarded as the main tool to revive growth – not fiscal policy either. Instead, far-reaching structural reforms are badly needed in China to restore confidence of consumers and investors. Monetary policy alone is not strong enough to sizeably create new consumer confidence.
Largest stimulus package since the bad days of covid-19
The latest monetary stimulus package by the PBoCindicates clearly that China’s political leadership has become increasingly concerned about the (gloomy) outlook for the economy which is partly linked to the highly burdened real estate sector as well. Different measures to reduce borrowing costswere introduced. For example, the People’s Bank of China cut interest rates on existing mortgages and created new lending capacity by reducing cash requirements for banks. The PBoC also announced that the necessary deposit for buying a second home will be lowered from 25% to 15%, and that restrictions on borrowing for investments in stockswill be easened.
Usually, I consider increasing Chinese worries about the economic development already after reliefs of cash requirements only. This time, instead, a whole package of monetary easening was introduced. This should probably be interpreted as further growing political leadership worries aboutthe chances of meeting the 5% GDP-growth target for 2024.
Sure, one may wonder about the real size of these political leadership worries when reading on the same day of the announcement of the stimulus package that “in general, the national economy maintained stability while making steady progress in August. Production and demand sustained a recovery, and employment and prices remained stable” (see here about the economic data in August https://www.chinadaily.com.cn/a/202409/24/WS66f1ee40a3103711928a9532.html). Real official belief in the above-mentioned economic analysis for August would not have made the recent central bank measures necessary…
Will the stimulus package help?
The answer to the question above seems to be obvious – no or not enough. Some possible – but certainly limited – relief on the real estate market cannot function as a real growth stimulator when relating to all the structural imbalances in the Chinese economy. There are bad bank loans, largely indebted municipalities and provinces, high implicit state-government debt, unprofitable state-owned companies, subsidized pricing in many areas, insufficient competition, tensions with important trading partner countries, all the institutional shortcomings, the influence of the almighty CP on the whole Chinese economy, etc.
Conclusion: The absence of urging structural reforms in many imbalanced areas of the Chinese economy and society hardly can enable uncertain consumers to raise their mood visibly with following GDP-improving effects. Central bank measures cannot do the job alone – not either this time. At least not when it comes to GDP in reality.
The Third Plenum of the Chinese Communist Party’s Central Committee uses to be an important event. In the past, Third Plenums have taken place in fall following a Party Congress – with focus on the political leadership’s future economic and reform agenda.
The first – in my view – really memorable Third Plenum goes back to its number 11 in 1978 when China’s groundbreaking visionary leader Deng Xiaoping started up China’s famous process of economic reforms and opening-up, and, consequently, its modernization – with agriculture, industry, defense, science and technology as the main areas for the future.
This time, the Third Plenum happened in July, sending again quite a number of messages to the Chinese people and the rest of the world. But what do the messages tell us this time – or not?
Disappointments after the 18th Third Plenum
The credibility and outcome of this year’s Third Plenum still has characteristics of a conundrum. However, I do remember very well the plans and visions of the Third Plenum from 2013. Initially, I then had a feeling that China really might be on the way to a promising economic policy. Quite a number of modern guidelines and objectives could even having been picked from famous Western economic research and textbooks.
However, when checking all the details from the Third Plenum in 2013, one can now recognize that many envisaged or promised objectives from this policy convention have not been met and partly rather developed into the negative opposite during the following years. A deepening look into the quoted summary above – by the way prepared by the law firm Clifford Chance – should indicate or confirm that many officially strived policy improvements did not come true or did so only partly. In my eyes, the failure of giving the market economy a “decisive” role looks particularly disappointing. Rather the opposite could be noted during the past decade.
The question marks after the 20th Third Plenum
The 20th Third Plenum was concluded this summer on July 18. The official communique confirms also this time the long-term visions and supremacy of the Communist Party (http://en.cppcc.gov.cn/2024-07/19/c_1006186.htm).
When reading this communist party document, “everything“ seems to have developed well in the past years and been put on the right track for the foreseeable future.
Thus, the poor or at least insufficient current economic development is not discussed in the communique. Self-criticism seems to be more or less absent apart from a few general statements like “complex developments at home and abroad”; instead, formulations such as “we have achieved economic recovery and growth and have made firm strides in building a modern socialist country in all respects” look more representative for the pitch of the communique from this year’s Third Plenum.
Nonetheless, it should be worthwhile to quote the following conclusion from the communique, i.e. that “ the Central Committee made systematic plans for further deepening reform comprehensively with the emphasis on building a high-standard socialist market economy, promoting high-quality economic , supporting all-around innovation, improving macroeconomic governance, promoting integrated urban-rural development, pursuing high-standard opening up, advancing whole-process people’s democracy, promoting socialist rule of law with Chinese characteristics, deepening reform in the cultural sector, ensuring and improving the people’s wellbeing, deepening reform in ecological conservation, modernizing China’s national security system and capacity, deepening national defense and military reform, and improving the Party’s leadership in further deepening reform comprehensively to advance Chinese modernization…”
—> whatever all this could mean for the future.
Altogether, we can be quite safe about drawing the following six conclusions from this year’s Third Plenum:
China will keep its political top-down governance of the economy;
science and advanced technology play a growing role in the future;
there is no recognizable strategy for the different future challenges;
macroeconomic analysis and future policy approaches are still absent;
the environment continues to play an important role;
there is no clarifying strategy for China’s complicated overcapacity issue, the demographic challenge and the fight against (youth) unemployment.
Hubert Fromlet Affiliate Professor at the School of Business and Economics, Linnaeus University Editorial board
China had until recently a couple of decades with impressing GDP-growth numbers. However, this development was not possible without pain and flipsides such as poor environment, credit bubbles, real estate crises, massive local indebtedness, enormous subsidies to state-owned enterprises, etc.
These burdens are still there – certainly dampening ongoing and future economic growth. Despite lacking transparency – also when it comes to real GDP growth – the world outside China is now much more aware of China’s structural growth problems than before the eruption of covid-19.
However, one major Chinese structural challenge is still widely neglected or forgotten in Western countries, particularly in commercial circles – the rapidly deteriorating demographic conditions.
300 million Chinese pensioners
China’s population amounted in 2023 officially to 1.41 billion – only slightly behind India after having been the number-one country by population during many years (India in 2023: 1.43 billion).1.41 billion meant a population decline for the second year in a row. In 2022, Chinese authorities noted also the first population drop since 1961.
India’s move to the top of global population or – in our context – China’s fall from the very top to the second position can be explained in three interconnected ways:
¤ First, by India’s clearly younger population.
This fact also means that India’s demographic perspectives point at a much more favorable population outlook than in the case of China; probably also as regards long-term GDP growth (if the younger Indian people will be provided with necessary education).
¤ Second, by China’s perennial one-child policy.
After 35 years of one-child policy, Chinese political leaders finally allowed couples in 2015 to have two children, since 2021 even three. In my view, 2015 was at least ten years too late for tackling the forthcoming demographic challenges. It should have happened strategically in the early days of optimism and rapidly increasing economic growth.
¤ Third, slowing GDP growth tends to counteract increasing birth rates.
This experience from our part of the world can also be applied to today’s China. Couples think in worsening economic times more frequently that they cannot afford (further) children. More concretely, the fertility rate fell in 2023 to just one child, mainly due to worsening conditions on the labor market – e.g. for young academics! – and increasing financial uncertainty of private households. Before covid-19 the corresponding ratio was still at 1,50. Urbanization should have contributed to the declining fertility as well.
Altogether, the demographic trends in China seem to be extremely challenging, particularly since the population above 60 years already includes as much as almost 300 million people and is calculated to go on growing quickly in the future. Furthermore, longevity should be rising further.
Thus, one can easily recognize that a lot of different tensions and imbalances are hidden behind the Chinese age pyramid. In 2002, there were still ten working people on one pensioner. For 2030, the corresponding numerical relation will be four working people by one pensioner, even lower ratios are mentioned by researchers.
We can foresee that China really is facing dramatic demographic changes that are predicted to continue into the wrong direction for some decades beyond 2030. China’s total population is estimated to shrink below 4 billion already ten years from now. Researchers at the Australian Victoria University forecast as well that the number of Chinese working people will be equal to all retirees around 50 years from now – indeed a scaring scenario (https://www.vu.edu.au/about-vu/news-events/news/chinas-population-shrinks-again-and-is-set-to-more-than-halve).
50 years is, of course, a very long time horizon for a forecast. In the meanwhile, developments may turn to the worse or to the better. Considering all imbalances in the Chinese economy, however, it looks hard to recognize a less gloomy demographic outlook already in the forthcoming 10-20 years, since demographic trends for such a limited demography period tend to be fairly predictable – at least what concerns the direction.
What could be done?
Here we certainly have a question that many – or even most – Chinese focus on these days. But reality of the demography mystique and its cure is extremely tough as the theoretical examples of possible action manifest below.
¤ Raising the age for retirement.
This could be an alternative forward, particularly since Chinese men usually retire from their jobs already at 60 years of age and working women at 50 (factory workers) or at 55 (white collar). However, many observers consider such a step psychologically and socially as risky and economically as insufficient to solve the whole demographic problem though intentions in such a direction already have been addressed. Certain experts claim even that Chinese decision-makers have no choice anymore and simply have to raise the age for retirement – whatever it takes. But it should be added that enterprise employees already work as much as 49 hours a week.
¤ Improving the conditions for the three existing insufficient pension pillars.
Improvements of the governmental, the voluntary corporate and the voluntary private pension pillars have been discussed in different Chinese fora – but do definitely not look promising because of huge capital shortage in all three pension regimes. For fiscal reasons, China should indeed refrain from rapidly rising public debt.
¤ Generally: economic policy aiming at (considerably) higher GDP growth.
It remains a conundrum how such an objective could be met when the labor force as a main growth factor will be shrinking faster. Sure, the political leaders want to see more high tech and value-added in production. But I cannot imagine how this could take place in a satisfactory way with the scarce future labor market resources. Considerably more automation in production seems to be only a partial approach. Heavy application of AI remains a potential joker – but also an unpredictable one.
¤ Specifically: economic reforms as intended by the Third Plenum in 2013.
Sticking more ambitiously again to these growth-stimulating plans with more market economy and better institutional conditions would certainly be a good GDP-growth idea – but most probably not sufficient to provoke a desirable GDP boom (but better than the current course of economic policy).
¤ Labor force immigration.
This is not a realistic option for China – neither theoretically nor practically (where should all the needed people come from?).
Conclusion: Having checked out different Chinese alternatives for tackling the demographic challenges in the forthcoming two or three decades to start with, I could not find any promising and simultaneously realistic way to manage the forthcoming demographic crisis successfully – particularly not under current policy conditions.
In my opinion, not even a combination of higher retirement age and better structural conditions for GDP growth would completely solve the demographic crisis – in the most favorable scenario most probably only dampen the negative consequences after quite some years.
Indications are strong that Western corporations already in the forthcoming decade – and also beyond – will be confronted with declining potential growth in China. The demographic burden looks much heavier than most corporate managers seem to anticipate these days.
China’s current political strategy to boost private consumption could fail drastically when/if pensioners will have growing financial problems, and the working people increase their savings ratio because of concerns about their financial future. Psychology will play a major role in this context. It cannot be ruled out that China’s demographic challenges may mean a bigger threat to Western companies in the longer run than China’s wildly expected progress in AI and modern technology.
Summary – more focus should be put on demographics
¤ It seems to be a good advice to Western commercial strategists to followdemographic developments in China in the forthcoming decade(s) very carefully in order to find an appropriate China analysis and strategy.
¤ Western companies need a real long-term strategy for China – not only for the next few years – with the demographic challenge as a major parameter.
¤ However, everything written in this article deals by definition with an uncertain future. I therefore wish all readers to applyall above mentioned forecasts and scenarios on China’s demographic challenge with necessary circumspection and humility – though the enormous challenges are obvious.
Hubert Fromlet Affiliate Professor at the School of Business and Economics, Linnaeus University Editorial board
