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Population, Policy, and Prospects
for Chinese Growth
Andrew K. Rose
Berkeley-Haas
with considerable presentation help from
Shang-Jin Wei, ADB
Outline
• Recent changes in the population control policy
and their impact on the Chinese economy
• From “one-child policy” to “two-child policy”
• China’s growth slowdown and impact on other
economies
Evolution of the Chinese Population
Control Policy and Total Fertility Rate
4
5
Why do We Care? Growth!
Standard theories link output growth to
(a) the growth of the working age cohort
(b) the dependence ratio
-0.50%
-1.00%
-1.50%
7
2030
2028
15-59
2026
3.00%
2024
15-64
2022
3.50%
2020
2.00%
2018
China
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
2.50%
1990
1988
1986
1984
1982
1980
1978
1.00%
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
Growth rate of working age
population: China vs. USA
4.00%
US 15-64
US 15-59
1.50%
USA
0.50%
0.00%
Chinese working age population peaked in 2011
1100000
2014
1000000
900000
2011
pop 15-64
800000
700000
pop 15-59
600000
500000
400000
300000
2028
2025
2022
2019
2016
2013
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1953
1950
200000
8
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
0.75
Inverse of the Dependence Ratio:
Share of 15-59 Cohort in Total Population
0.7
2009
PRC
0.65
0.6
India
USA
0.55
0.5
0.45
9
Bad News for Chinese Growth!
• GDP growth rates, savings rate, and current
account/GDP peaked around 2011
• Life-cycle theory links the working age cohort
pattern to these variables
10
Something More Sexy
• The sex ratio pattern plays an important but mostly
unrecognized role
• Key researcher: Shang-Jin Wei (Berkeley student,
now on leave from Columbia GSB at ADB)
11
Sex Ratio (age 0-14)
1.2
2011
PRC
1.15
India
1.1
US
1.05
1
0.95
12
• The competitive saving motive: people save partly due to
a desire to improve their status in the dating/marriage
market
• Can hold in any society
• But a rise in the sex ratio both greatly exacerbates its relative
importance as a determinant of the savings rate and make it
possible to estimate it empirically
• The effect can go through the parent cohort
• Finding: about ½ of the rise in the household savings
from 1990-2009 may be linked to a rise in the sex ratio
13
Many Implications!
• Higher savings and thus higher current account
surplus results from a rise in the sex ratio
• Relationship between competition on human capital vs
physical capital accumulation
• Can also have major effects on housing prices
• Important for other countries (India …)
14
1
1
1.5
With a daughter
1.5
With a son
.5
High sex ratio
region
0
0
.5
Housing value (log)
High sex ratio
region
Low sex ratio
region
-.5
-.5
Low sex ratio
regions
4
5
6
7
8
Household income (log)
9
4
5
6
7
8
Household income (log)
Low sex ratio
Low sex ratio
High sex ratio
High sex ratio
9
15
Urban area
1
1.5
2
2.5
Rural area
100
110
120
130 100
110
120
130
Sex ratio
16
.5
Haikou
Beijing
Kunming
Xiamen
Hangzhou
Fuzhou
Shenzhen
Nanning
Shanghai
Ningbo
0
Nanjing
Guiyang
Xining
Taiyuan
Lanzhou
Tianjin
Haerbin
Dalian
Guangzhou
Hefei
Wuhan
ChengduJinan
Qingdao
Nanchang
Xi'an
Shijiazhuang Zhengzhou
Changchun
Wulumuqi Chongqing
Shenyang
-.5
Yinchuan
Changsha
Huhehaote
-.05
0
.05
.1
e( sex_ratio | X )
.15
.2
coef = 2.810499, (robust) se = .5964873, t = 4.71
17
Impact on Economic Growth
• Much evidence that sex imbalances adversely affect
crime
• But some potential benefits
• Entrepreneurship induced by sex imbalance
• New domestic private firms – important growth engine –
more likely to emerge in regions with sex imbalances
• Parents with sons more likely to be entrepreneurs with local
sex imbalances
• More dangerous/unpleasant work (e.g., mining) by
households with sons in regions with sex imbalances
• No effect on labor supply of households with daughters
• Regional GDP grows faster in provinces with higher sex
imbalances
• Net Result: possibly extra 2 ppts/year (!)
Effects of Recent Changes in Population Policy
• From “one-child policy” to “two-child policy”
• Elasticity of child-bearing parents
• The short run response is mild: about 20%
• Medium term: could rise to 40-60%
• On working cohort:
• No effect in the next 15 years; then improving
• On dependence ratio
• Worsening in the next 15-20 years; then improving
• On the sex ratio for the pre-marital cohort
• Improving
Effects, continued
• On household savings and current account
• Decline/improving
• Will see discussion on the “success of the rebalancing
policies of the government” even though it could be an
unintended consequence of the changes in the population
control policy
• On GDP growth
• The sex ratio effect: further moderation of the growth rate
• The working age cohort effect:
• No effect to small further moderation in the next 15 years
• Improvement after 15 years
The China Slowdown Question
Motivation: China Growth Downgrades
PRC: Forecasts by Asian Development Outlook Vintage,
2014-16
Sept 15 ADO Update
Jul 15 ADO Suppl.
Dec 14 ADO Suppl., Mar 15 ADO
Apr 14 ADO, Jul 14 ADO Suppl., Sept 14 ADO Update
7.6
7.4
Percent
7.2
7.0
6.8
6.6
6.4
6.2
2014
2015
2016
• What exactly do we mean by a PRC slowdown?
• Soft vs. hard landing scenarios
• How big is the impact on different regions and
countries?
• Two approaches:
• “Standard analysis” - Global Projection Model
simulations,
• Taking into account GVCs - using inter-country I-O tables
Soft vs. Hard landing scenarios
• “Soft landing” scenario
• A reduction in GDP growth by 25 basis points /year
• Corresponding deceleration in investment
• Current baseline - we’ve seen it in the last two years
• Relatively “orderly”
• “Hard landing scenario”
• Sharper and more persistent growth deceleration
• ~2pp per year for two years)
• Accompanied by a spike in global risk aversion
• About one-third of a “Lehman” in VIX
Guestimates from Global Projection Model
• 7 regions (US, Euro area, Japan, China, Emerging Asia
ex-China, Latin America, and Remaining Countries); 85%
of world GDP
• (Aims to strike a balance between DSGE and VAR/time
series models)
• Developed mostly at the IMF
• Can identify shocks, (some) transmission channels,
policy responses; gives comprehensive picture, as it
contains trade, financial, and commodity price channels
• Caveats: (a) no GVCs, and (b) few individual countries
“Soft Landing”
Substantial effects on Japan and Emerging Asia,
little effect on US and Europe…
China "soft landing" scenario
(deviation of GDP growth from baseline, first two years)
1.00
0.80
0.60
0.40
Percent
0.20
0.00
-0.20
-0.40
-0.60
-0.80
-1.00
China
US
Euro Area
Trade+other effect
Japan
EA ex PRC
Commodity effect
Total Effect
LA
RC
World
What does a “hard landing” in China look like?
Suppose past disorderly slowdowns
elsewhere are a guide…
Magnitudes of Growth Decelerations During Disorderly Slowdowns
(Growth in the 1st 2 years after the event relative to growth in previous 5 years, % points)
Real GDP
Government
consumption
Investment
Private
consumption
Imports
Exports
Credit boom-bust
-3.4
-1.0
-11.7
-2.8
-7.9
-3.1
Banking crisis
-2.0
-1.0
-8.0
-2.0
-6.3
-1.5
Investment
slowdown
-2.7
-2.1
-23.3
-2.1
-14.5
-3.7
Housing downturn
-2.1
-0.2
-7.8
-2.2
-6.4
-3.0
Growth slowdown
-5.0
-1.7
-14.3
-4.3
-9.7
-6.2
One “Hard Landing” scenario
• An initial reduction in real GDP growth by 200
basis/year over 5 years
• … followed by a tightening of the global financial
condition (about 1/3 of the Lehman shock)
01/02/2004
4/23/2004
8/13/2004
12/02/2004
3/24/2005
7/14/2005
11/01/2005
2/23/2006
6/14/2006
10/03/2006
1/25/2007
5/16/2007
09/05/2007
12/24/2007
4/16/2008
08/05/2008
11/21/2008
3/17/2009
07/07/2009
10/23/2009
2/16/2010
06/07/2010
9/24/2010
1/13/2011
05/05/2011
8/24/2011
12/13/2011
04/04/2012
7/25/2012
11/14/2012
03/08/2013
6/27/2013
10/16/2013
02/06/2014
05/29/2014
09/17/2014
01/07/2015
04/29/2015
08/18/2015
Recent Market Turmoil in China led to VIX
spiking above 40 for first time since Euro Crisis
VIX, 2004-Present
90
80
70
60
50
China
market
turmoil
40
30
20
10
0
“Hard Landing” would affect All Regions Negatively
China "hard landing" scenario
(deviation of GDP growth from baseline, first two years)
0.80
0.00
Percent
-0.80
-1.60
-2.40
-3.20
China
US
Euro Area
Trade+other effect
Japan
Commodity price effect
EA ex PRC
Financial shock effect
LA
Total effect
RC
World
If RMB depreciates, China’s slowdown muted,
other countries hit harder
Hard landing
1.60
0.80
0.00
-0.80
-1.60
-2.40
-3.20
China
US
Trade effect
Euro Area
Commodity price effect
Japan
EA ex PRC
Financial shock effect
LA
Exchange rate effect
RC
Total effect
World
China Impact: Taking into Account
Regional and Global Value Chains
Assessing spillovers via world
input-output tables
• Can trace effects on individual countries/sectors
• Explicitly accounts for trade and production linkages
• Need to specify how much various domestic
demand components slow in China
• Limitations: uses production linkages as of 2011;
static model (no adjustment of production in
response to the shock); no price/ToT effects; no
policy response
Most of China’s recent slowdown has come
from a slowing of investment…
China: Real GDP and Contributions from Demand
Side, 2010-2015
Contribution from Consumption
Contribution from Investment
Contribution from Net Exports
GDP Growth
Contributions from:
GDP
Growth
2010-11
10.4
2012-13
7.8
previous 4Q
7.5
last 4Q
7.1
14
12
8
6
4
2
0
09/2015
03/2015
09/2014
03/2014
09/2013
03/2013
09/2012
03/2012
09/2011
03/2011
09/2010
-2
03/2010
Percent
10
C
5.5
4.3
4.2
4.1
I
5.0
3.5
3.5
2.6
NX
-0.1
-0.1
-0.2
0.4
… and if a disorderly slowdown should occur, it
will also mostly come from slowing investment
Banking crises (historical episodes)
20
20
15
15
10
10
5
5
Percent
Percent
Credit boom-busts (historical episodes)
0
0
-5
-5
-10
-10
-15
-15
-2
-1
0
1
2
3
4
5
-2
-1
0
1
2
3
Government consumption
Government consumption
Investment
Investment
Private consumption
Private consumption
Imports
Imports
Exports
Exports
4
5
… and if a disorderly slowdown should occur, it
will also mostly come from slowing investment
Housing downturns (historical episodes)
20
20
15
15
10
10
5
5
Percent
Percent
Investment slowdowns (historical episodes)
0
0
-5
-5
-10
-10
-15
-15
-2
-1
0
1
2
3
4
5
-2
-1
0
1
2
3
Government consumption
Government consumption
Investment
Investment
Private consumption
Private consumption
Imports
Imports
Exports
Exports
4
5
• When we consider input-output linkages or GVC
linkages, it becomes important to distinguish shortrun and medium-run effects
• In the short-run, because the production relations
are hard to adjust, the negative effects tend to be
big – perhaps comparable to the hard landing
scenario in the GPM simulations
• In the medium-term, however, production relations
can adjust, and only the location of the final
demand would matter. This often implies a smaller
negative effect from a fall in the growth rate of
China’s final demand
Even if China’s GDP were to fall by 4.5pp, the
effects for other countries tend to be more
muted in most cases
0
-1
-2
-3
-4
-5
The I-O approach allows us to identify sectoral
contributions to GDP declines
5 most affected countries
Selected advanced economies
0.0
0.0
-0.2
Other services
Other services
Real estate and other
business activities
Real estate and other
business activities
Financial Intermediation
-0.2
Financial Intermediation
Transportation and
communication
-0.4
Trade, accommodation and
food services
Transportation and
communication
-0.4
Trade, accommodation and
food services
Construction
-0.6
Utilities
Construction
-0.6
Utilities
Manufacturing
Mining and Quarrying
-0.8
Manufacturing
Mining and Quarrying
-0.8
Agriculture
-1.0
Agriculture
-1.0
TAP KOR MAL AUS VIE
JPN
DEU
FRA
USA
But … China still accounts for
35-40% of Global Growth
Contributions to World Growth
People's Rep. of China
Other emerging market and developing economies
Advanced Economies
World growth
Percentage points
7
6
5
4
3
2
1
0
-1
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
-2
Contributions to Global Growth
Percentage contributions to global GDP growth
 Asia continues to account for about 60% of global growth; still
fastest-growing region
41
China Slowdown: Keeping Things in Perspective
• “Soft Landing” still much more likely than “hard
landing”
• China will remain a main engine of growth for the
world economy in the foreseeable future
• Slowdown inevitable: Pritchett and Summers
emphasize how unusual durability of Chinese growth;
underemployed labor now gone, there are diminishing
returns to capital, hard to boost service productivity,
SOEs need reform, heavy debt …
• With the changes in the population control/family
planning policies, and with continued growth in per
capital income, its effect after twenty years will only
rise