The first one probably needs no introduction:

China - changing age composition - Nomura ICMR

You’ll have heard a lot about this lately — partly because that 2015 turning point is looking a bit optimistic, since an official report said the working-age population actually shrank in 2012.

Now, we’re not sure this is quite the disaster everyone’s making it out to be. China, for example, has a relatively inefficient labour force and its industries are not terribly automated compared to say, western countries. There’s scope for doing more, with the right kind of investment.

However, that’s all for the future. This next chart shows how China has grown in the past decade or two:

China - components of growth 1995 to 2011 - Nomura Foundation

Note that a portion (0.7 percentage points) comes from labour input growth (ie, more work, which is in large part a function of a growing workforce). Growth in labour input also forms part of the total factor productivity growth (which itself was 3.7 percentage points). So, we can see straight off that China could lose a chunk of potential growth as the labour force begins to shrink.

Secondly, the big contribution of capital input to growth needs to fall as the economy rebalances. And, as the next chart shows, it will also have to become much more effective if anything like current growth rates can be maintained.

To chart three…

The right-hand column (ICOR – incremental capital output ratio) shows how extremely unproductive China’s capital is compared to Japan, South Korea and Taiwan during their transformational expansions. And that Chinese capital productivity has actually worsened in recent years:

China - capital output ratio compared to Japan, SKorea, Taiwan - Nomura ICMR

The charts are all from a presentation by C. H. Kwan, a senior fellow at Nomura’s Institute of Capital Markets Research.

They display, with great clarity, some of the unavoidable realities of China’s economy which we’d summarise thus:

1. China’s growth to date has been based on cheap plentiful labour and massive levels of capital investment.

2. Both of these are set to decline. Working age population has peaked and China’s capital efficiency is poor. (No surprise here. Where, for example, does all that steel actually go?)

3. If its capital efficiency rose to match, say, Japan’s, China’s growth prospects could theoretically be maintained or at least remain high.

4. However certain powerful structures — particularly the SOEs, but a lot of other policies in dire need of reform — are standing in the way of dramatically improving capital efficiency.

5. So far there is little sign that the new leadership is willing to take the difficult steps to remove those barriers to increased efficiency. For example, it would mean privatising the large and cossetted state-owned enterprises. However, the SOEs are by their nature big and well-connected.

Of course, as we said earlier today — it’s early days for the new leadership who aren’t even officially in power yet.

Related links:
Nope, China still has the same old problems – FT Alphaville
China’s (not remotely insignificant) rebalancing challenges – FT Alphaville
Magnus on China’s investment cliff - FT Alphaville
A gesture, at least, towards Chinese redistribution and rebalancing – FT Alphaville

Copyright The Financial Times Limited 2023. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article

Comments