Twofish's Blog

March 22, 2007

China’s aging workers

Filed under: china, finance, quantitative finance — twofish @ 8:08 am

http://www.nytimes.com/2007/03/22/world/asia/22china.html

It’s interesting how the NYT moves from crisis to crisis, and has just discovered that China has a huge pension liability problem and an issue with a rapidly aging population.  It’s also interesting that the article doesn’t mention at all, the ***real*** big problem which is coming up.

The problem of China’s aging workers is something that people elsewhere have been thinking about for, I don’t know, the last twenty years.  The second that China started the one child policy, thirty years ago, people have been doing demographic projections, so this really isn’t a new problem.

And then there are the usual “we don’t know what to do, and the government is doomed”  slant, whereas the whole point of Chinese financial restructuring in the last ten years has been to deal with this problem.

I don’t think that it is going to be an insurmountable problem. China has vast pools of savings. The pension hole is about $1.5 trillion, but China has $1.2 trillion in foreign exchange reserves and that number is growing. Also, China has very low productivity, unlike Japan, Chinese workers can produce more by moving from farm to factory.

What really somewhat annoys me is all of the economists that have been saying that China saves too much, should consume more, and switch from a capital-intensive system to a labor-intensive system, and that it is unhealthy for China to be saving 40% of GDP, and that China should spend like there is no tomorrow like Americans do.

But wait!!!! Suddenly there is this realization that hundreds of millions of people are going to retire over the next decade. Oh my goodness, we are doomed. Well maybe it wasn’t just a bad idea that Chinese have been saving like crazy for the last twenty years, unlike these short-sighted economist, the average Chinese peasant realizes that they are going to grow old, and they want to do something about it, and unlike the US government, the Chinese government has been spending the last decade coming up with effective ways of dealing with the aging population.

I’m not too worried about China, since when China grows old they are going to start withdrawing the trillions of dollars that they have invested in the United States. What worries me is what will happen in the United States when that starts happening, and it’s interesting that the New York Times article doesn’t mention the implications of that.  China is pumping $200 billion into the US economy each year because China doesn’t have the financial system to handle all of the retiree money, but the United States does.  At some point this outflow will become an inflow, both as China develops its financial system so that it can invest the money without a “round trip” into the United States, and as retirees retire.

It will be interesting to see what happens.  China will be in good shape because people have been planning for that moment for a long time.  The United States on the other hand……  There is this interesting paragraph…

Most troubling to financial experts, the government has used payroll taxes paid by the current generation of workers, who in theory are paying into their individual retirement accounts, to pay pensions for the previous generation.

Troubling.  Yes.  In the case of China, it’s less bad because workers in 2020 will likely be much more productive than workers today, and having a “pay as you go” system will push some of this productivity into the aging population.  Chinese save money today.  This goes into a factory that increases the wealth of workers there.  Some of this wealth goes into a payroll tax which funds pension.  It works as long as there is this pool of extra productivity.

Now if you don’t have this pool of productive then if you use a “pay as you go” method of financing Social Security, you are asking for problems…. Especially if your economy is dependent on funding from another country that is saving for its retirees…..

Oh wait……

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3 Comments »

  1. […] and Withdrawing Trillions of Dollars From Twofish’s Blog: It’s interesting how the NYT moves from crisis to crisis, and has just discovered that China has […]

    Pingback by Risk and Withdrawing Trillions of Dollars « The Weifang Radish — March 24, 2007 @ 1:32 am

  2. [China is pumping $200 billion into the US economy each year because China doesn’t have the financial system to handle all of the retiree money, but the United States does. At some point this outflow will become an inflow, both as China develops its financial system so that it can invest the money without a “round trip” into the United States, and as retirees retire.]

    you need to take general equilibrium more into account.
    the said inflow to outflow scenario is only possible if later down the road
    you find other peoples willing to accumulate claims on corporate USA at reasonable prices.

    Comment by Anonymous — March 31, 2007 @ 9:10 am

  3. I agree with your comments about hidden productivity in China’s provinces. China is like two different countries- a rural 3rd world one with low wealth, income, and productivity and a developing urban one with higher productivity.

    However, in comment to: “What really somewhat annoys me is all of the economists that have been saying that China saves too much, should consume more, and switch from a capital-intensive system to a labor-intensive system, and that it is unhealthy for China to be saving 40% of GDP”

    I believe, and I may be incorrect, that perhaps the main reason for encouragement of personal spending is:

    * Internal Investment- to better indigenously develop the country’s industry and resources without relying on the whims of foreign investment and also without being encouraged to invest abroad.

    * There are also a couple of other more techincal explanations you can find interspersed in Michael Pettis and Brad Setzer’s comments on this news/blog service: http://www.rgemonitor.com/asia-monitor

    One reason China’s savings rate is so high is that they lost a lot of social programs that once could provide for them; also now that they only have one child to support them in their old age- they must prepare themselves better for mostly-unsupported retirement.

    http://chinacomment.wordpress.com

    Comment by chinacomment — July 7, 2008 @ 1:51 pm


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