China’s basket of challenges: The country faces a disadvantageous demographic shift

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February 25, 2021 6:45 AM

The country faces a disadvantageous demographic shift, even as its reputation has taken a beating on multiple fronts

In its frenzied pursuits of wealth and power China perhaps is causing too much damage to its own economy and the global trade ecosystem.In its frenzied pursuits of wealth and power China perhaps is causing too much damage to its own economy and the global trade ecosystem. (Representative image)

China is possibly going to encounter a series of social and economic challenges in the near future. First is the social menace that is unravelling behind the garb of China’s economic miracle: its ageing population. Dealing with ageing is first and foremost a quality-of-life issue, but it also has economic implications. Current statistics suggests more than 17.5% of its people are already 60 years of age in 2021 (bit.ly/37FB3n1), and will surpass 25% in 2030. No adequate healthcare facility or social safety net is in place to take care of this ageing crisis.

This development would have a debilitating effect on China’s labour force. It will shrink the productive workforce, but by how much exactly is not yet known. As China’s workforce shrinks, the 60-65-year-old cohort will increasing. Keeping this group and the ‘young olds’ healthy and active is going to be a challenge. It may face a dramatic labour-force decline and register higher unemployment rate. Unemployment is currently hovering around 3.8% (https://www.imf.org) and is expected to further rise in the aftermath of Covid-19 pandemic. Productivity which is largely dependent on labour force comprising skilled and semi-skilled labour will also be affected. As China prepares to deploy more of AI and machine learning, menace of unemployment will rear its ugly head once again. Its claim of lifting people out of poverty may not last as more people may get pushed below the poverty line. Currently, there seems to be no political thinking on this in China, neither is any effective economic policy post Covid-19 in place.

China started counting on robots and automation to fill the gaps in the labour force, but it is impossible to make the pace of automation match decline in a particular employment- or job -profile this early. Social security and retraining will become important to help people.

A second weakness that is visible is its lack of innovation and IPR violation. China, to a great extent, has violated the norms and rules of IPR. Several disputes focused on this are also pending with the WTO. If digital services take the edge over the movement of goods, then design, data, transmission of ideas will be crucial and will need IPR protection. This is where China’s reputation will put its future at stake. India must take advantage of this.

Third, China will face a crisis in steering its economic growth as its over-reliance on foreign investment may take a beating. This is expected because the spectre of Covid-19 ‘origin’ is going to haunt China for some time. China’s debt-to-GDP is already very high, to the tune of over-303%. Borrowings in the form of corporate, household and government debt have been high. Asset price bubbles, and complex hidden risks pose a major systemic danger to the world’s second largest economy. Such financial danger reminds of a “Minsky moment” hitting China’s economy. In its frenzied pursuits of wealth and power China perhaps is causing too much damage to its own economy and the global trade ecosystem.

All this debt got built up over the years as the financial system channelled resources to investment during China’s rapid growth phase, but the state-dominated system turned to be completely inefficient; as a result, certain amount of borrowing has not been recovered. The old, investment-heavy growth model is running out of steam because of which the debt-to-GDP ratio has been rising since the global financial crisis. If lending were financing productive investment and growth, then this ratio should be stable or rising only slowly. The evidence suggests that for over half of the infrastructure investments in China over the last three decades, the costs are larger than the benefits they generated, which means the projects destroy economic value instead of generating it. Such a dramatic development only confirms that China is currently sitting on a ticking bomb.

Fourth, Made in China 2025 industrial policy is trying to direct innovation in 10 key industries. This approach is unlikely to succeed and has caused great consternation among trading partners because of IPR and technology violations. The recent tech war between the US and China has already seen Beijing accused of trying to access personal data, defence establishments documents, etc.

On the carbon emission front, China is currently a major emitter. It now produces about 28% of the world’s emissions. Coal consumption, which exhibited some decline from 2013 to 2017, driven in part by a push to improve its notorious air quality, began to rise again in in 2019 and 2020 as the economy faced economic headwinds and the government sought to stimulate industrial growth.

Fora like the UN, WTO, etc, need to deal with modern environment and trade issues stringently. IPR, regulation relating to investment, dumping, cross-border data flows and subsidies where China seems to have operated non-transparently over couple of decades, need to be investigated with objectivity and transparency.

This will require practical compromises between China and the US. China will need to take on more responsibilities commensurate with its current power status.

The author is Professor, Lal Bahadur Shastri Institute of Management (LBSIM), Delhi

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