China's Economic Growth May Face `Big Drop' as Population Ages, CIC Says
China’s $300 billion sovereign wealth fund said there may be a “big drop” in the pace of the nation’s economic growth in the coming three to four years as more of the population retires.
“We cannot use the past 15 years or 30 years as a simple extrapolation of growth trends to forecast China’s future,” Lou Jiwei, chairman of China Investment Corp., said at a forum in Beijing today, according to prepared remarks obtained by Bloomberg News. “If we consider the population factors and the movement to a higher stage of development, it implies that China’s potential economic growth rate will experience quite a big drop in the next three to four years.”
China’s start of the one-child policy 30 years ago and longer life spans from better medicines are set to slash the number of working adults able to support each retired citizen. The nation needs to quicken urbanization, undertake tax reform and give smaller companies greater access to capital if it’s to continue the “relatively fast” growth that’s increased the size of the economy more than 90-fold in three decades, according to Lou.
Achieving an average annual growth rate of about 6 percent over the next 20 years will allow China to become a “high income” nation, Lou said. China has averaged 10 percent growth during the past three decades.
A CIC spokeswoman said she couldn’t immediately confirm the contents of the speech.
China’s population will change “drastically” as the ratio of working adults to those 65 or older declines from 9 in 2006 to 2.5 by 2050, according to the Washington-based Population Reference Bureau. Individuals 65 or older will account for 24 percent of the population by 2050, rising from 8 percent in 2006, the advocacy group said in a report on its website. That trend will “endanger” the nation’s health care system, according to the group.
As a result of its aging population, China’s economic growth rates may slow at an earlier stage of development than in Japan and South Korea, according to the speech transcript.
For now, China is sustaining its rebound from the financial crisis, with a manufacturing index exceeding forecasts today and analysts projecting 10 percent growth for 2010, up from 9.1 percent last year. The nation’s gross domestic product overtook Japan’s to become the world’s second largest in the second quarter of this year.
China should introduce a property tax to provide a stable source of funds for local governments, lower its highest income tax rate, and extend its value-added tax beyond manufactured goods to also include services, Lou said. Urbanization will help China absorb more of its own production and reduce its dependence on exports for growth, he said.
To spur innovation, China’s stock markets should funnel more funds to small and medium-size enterprises, Lou said. The nation’s markets are currently dominated by monopolies and regulatory barriers, he said.
“Difficulties of financing small and medium-sized enterprises haven’t been resolved,” Lou said. “This greatly restricts the development of smaller creative companies and represses the whole society’s creative potential,” he said in a speech entitled “China’s economy in the next 15 years.”
Rising income inequality may also undermine economic growth, by bringing about social and political instability, Lou said.
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