Mao’s (lack of) family planning skills: how China’s untimely population growth is coming back to haunt the dragon

Famously enough, Deng Xiaoping, when asked about Mao Zedong’s legacy, asserted that the Great Helmsman had done 70% right and 30% wrong. Although Deng was credited for far more precise policies and on-the-spot quotes during his fruitful leadership years, it might be time for current and upcoming Chinese leaders to update this dubious percent distribution due to Mao’s terrible, nation-mortgaging family planning skills. In other words, China’s population exploded too early, and this might well be the main cause of today’s economic ills in the most dynamic world economy in the last 3 decades.

The basic reasoning goes like that: facing a much-anticipated economic growth slowdown, partially due to global economic tensions and instability both in the EU and the US, the Chinese economy badly – according to some analysts, rather desperately – needs to boost internal consumption and, therefore, lower the savings rates of much Chinese citizens, which hover above 50% of total disposable income.

One way to boost consumption would be, obviously enough, to increase total disposable income of Chinese workers and middle-income families, which, by all estimates, is relatively low in comparison with other countries with similar per capita GDP. However, this would probably suppose a death knell for the still developing Chinese economy, transitioning from an export-focused, labor-intensive, low-added value model to a hi-tech, added value model. In other words, raising salaries further – i.e. apart from persistent inflationary pressures – would mean a sudden loss of competitiveness for an economy which still exports its way to growth and which is facing increasing international pressure to keep revaluating its undervalued currency, the yuan. In other words, this is not the way Chinese political and business leaders are keener to follow.

What else can they do, then? Not much, indeed. The Chinese public was already heavily incentivized towards consumption by financial sector regulations that offered them a real negative return on their savings: while inflation was running well above 6% a year, interest rates for saving accounts have been capped below 3%. This also explains why many middle-class Chinese resorted to buying property, thus fueling an investment-led bubble that is now set to deflate, if not to explode, as prices reached unsustainable levels and the value of the investment decreased.

This undervaluing of savings has indeed allowed Chinese banks to fuel their almost uncontrolled lending practices vis-à-vis state-owned enterprises (SOEs), in a Chinese-way variant of the unchecked lending that caused massive leveraging in huge Korean chaebols by the mid-90s and subsequently fueled the massive Asian financial crisis of 1997-1998. Although China’s economy is far less exposed to foreign capital (prone to flee when the going starts getting rough) and strict capital controls make it difficult for local money to suddenly exit the country, the way most profits from undervalued private savings have been reused might not have been the wisest possible.

Sure enough, doling out credit to SOEs – including development companies headed by local and regional party leaders – meant fast profits for both the banks and the local, regional and national politicians behind both the banks and the SOEs. However but not reforming the currently inexistent social security net can have severe consequences for a country that has been unable to solve a legacy problem from the Mao era: China might be reaching a demography-led point of no return.

Let’s go back to the starting point: why do Chinese people save so much if their options are limited and real return on investment is even negative? As argued in a recent blog post on the ills of Chinese SOEs with the rather explicit title The Macroeconomics of Chinese Kleptocracy, poor and even middle-income Chinese want to be sure they will have enough money not to starve when they are old. 

China, a traditionally Confucian society, has always emphasized and relied upon the filial piety paradigm, according to which sons and grandsons would care for the elderly when necessary. Based on that, China could progressively scrap its social security net starting from the end of the Mao era without much initial social or economic backlash: although the one-child policy had already been implemented, the demographic trends still allowed for a massive marginal growth in working-age population – a growth which will be totally over by 2015.

However, current Chinese society is mostly based on inverted pyramid families (not to mention the alarming lack of young females due to culture and policy-led infanticide), in which one can find just one child with up to four grandparents. Obviously enough, current and future elders can no longer rely on filial piety alone to feed them (or pay for their medicaments), so they save as much as they can to compensate for the lack of old-age pensions, efficient public healthcare and other social safety measures that indirectly fuel consumption and discourage excessive saving in most developed countries. As long as future prospects of a more relaxed retirement do not come to reality, most Chinese will keep saving their hearts out.

Should, therefore, the Chinese government hasten to create even a limited version of European, East Asian (think Japan’s or South Korea’s) or U.S.-style welfare states? That should have probably been the answer, but it might be already too late for two reasons: global context, both thanks to structural factors and issues related to the current conjuncture, and demographic pressure.

As previously argued, marginal demographic growth of working-age population is grindingly coming to a halt, thus putting extra pressure on the flows of impoverished rural immigrants willing to work for low wages at export-oriented factories. Added to that, the increasing and otherwise unstoppable technologization and digitalization of China’s manufacturing sector – for instance, Foxconn, the huge electronic component maker, will 'hire' a million mechanical arms between 2012 and 2013 – and the necessary transition to a knowledge-based, greener economy can also severely hurt a country with a big chunk of its population still suffering from poverty or relatively low incomes – even if per capita GDP at purchase-power-parity already stands at $8400 (2011 data; source: CIA World Factbook), China’s income inequality is extremely high, and rising, with a GINI index of  48 (2009 data; source: CIA World Factbook), making it the 27th most unequal country worldwide.

Added to that, while the current number of Chinese over 65 years of age is still relatively low for developed country standards, it is no longer so for a developing country devoid of a social safety net. Moreover, the problem is set to dramatically increase in the coming decades, with a projected XX% of the population over the age of 65 by 2050 – i.e. before China, even if generous growth rates are somehow maintained, reaches an economic development level comparable to that of richer countries.

Unemployment benefits for future out-of-job low-skilled factory workers, old age pensions for a growing mass of elderly people, healthcare benefits for an increasingly restive population of rural immigrants residing in cities without the corresponding urban hukou and other much-needed reforms might pose a very serious, growing economic burden for the Chinese state, especially in the midst of a probable global double-dip recession mostly affecting its key economic partners.

Bad timing? Probably. Bad policy choices? Maybe. In any case, major blame should not be put upon sheer luck or the often-maligned one child policy, which indeed was a desperate measure aimed at stopping undue demographic pressure on a country whose natural resources are already stretched to the maximum. Rather, blame should rest upon Mao Zedong’s belief that the key element for national survival in a time of political unrest lay upon a huge population not only helped fuel China’s Communist chaos, but also created an untimely time bomb whose consequences might be dearly felt in the next few years.

While it is undeniable that China’s explosive birthrates and subsequent rural healthcare improvements in the 50s and the 60s set the basis for the economic surge of the 80s and the 90s – again, this massive marginal growth in working-age population, – the explosive growth it helped create might have also sown the seeds of future demography-led stagnation and crisis.

Obviously enough, only time will tell how events will truly unfold. China’s low public debt and deficit levels, as well as its massive foreign exchange reserves, standing at $3.3 trillion at the end of 2011, give ample maneuverability to the Government in case it decides to do something about China’s most pressing economic problem. However, and independently of the route taken by the future caste of Chinese leaders, in case Deng Xiaoping counted Mao’s family planning policies within his 70% positive decisions, it is about time that his successors recalculate the Mao-era plus/minus ratings and start implementing social-based reforms before it might be truly too late.