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January 19, 2008 in The China Beat


Copyright January 19, 2008. Used by permission.


James Fallows has a piece in the February, 2008 Atlantic on what he calls “The $1.4 Trillion Question” – why China continues to accumulate $1 billion a day in relatively low-return American assets (mostly Treasury bills), why this can’t go on forever, and what it could mean if this pattern of investment ends abruptly rather than slowly. On the whole, it’s a good introduction, with some useful background on the people responsible for making the central government’s investment decisions. (The point that one of the two key figures, unlike his counterparts almost anywhere else, has never invested for himself, or even bought a house, is a nice touch.) I think the article overdoes its emphasis on a lack of transparency in China – the way in which sub-prime mortgages were re-packaged as “AAA” securities has made clear that the American financial markets China has been investing in aren’t always that transparent, either – but that’s a matter of tone and emphasis. What the article is missing, I think, are two important pieces of demographic and historical perspective, which help illustrate the pressures on the government. Fallows spends a fair amount of time on changes in China’s mood that may be real but are hard to get a handle on — e.g. greater awareness among the population that their investments in the US are not earning much money (and some high profile ones have been outright losers, like the widely-publicized investment in the Blackstone Group) and that this is money that could be used to better things at home – and speculations about how much the government wants to, or can, continue resisting those popular desires in the interests of keeping inflation low, etc. I think the big story is more structural than that.

First the demography. Here the key point is one of the great under-played China stories : the rapid aging of the Chinese population. For roughly 30 years now, China has had compulsory birth control of various sorts, and (as most people reading this probably know) its birth rates declined at a rate that has very few historical parallels. So while the number of young people entering the work force every year has remained quite high until recently (China had so many births in the 1950s and 1960s that even with them having relatively few children per couple when they grew up, birth rates per 1,000 population stayed high into the late 1980s), the percentage of children in the population became quite low. Meanwhile, because Chinese death rates were very high before the Revolution, and stayed pretty high into the mid-1960s, there were also relatively few old people. So what economists call the “dependency ratio” – the ratio of people in the labor force to people whom workers need to support – has been extremely favorable for China over the last couple of decades:it’s now at about 2 workers per non-worker, versus about 1:1 for the U.S. But that is now changing pretty quickly (thanks mostly to public health improvements under Mao)and China will soon have a fairly old population; by 2030, it will have as high a percentage of old people as countries like Italy and Germany today, whose pension problems, etc., you read about periodically. [Some of the best work on this is by my UC Irvine colleague Wang Feng and Andrew Mason at the University of Hawaii – their paper in a newly published Cambridge Press book – China’s Great Economic Transformation, edited by Loren Brandt and Thomas Rawski, is well worth a look, though the book won’t be available for a couple more months.] China’s dependency ratio will probably reach today’s global average by 2020, and the current U.S. level of 1:1 by 2030.