China: Number Two With a Bullet

China’s rapid rise — it’s now officially the world’s second largest economy — conceals the tensions in a nation desperate to get rich before it gets old.

Shanghai, China


Recently-released economic statistics confirm what a lot of
people could see coming: China officially passed Japan as the world’s
second-largest economy last quarter, reporting a quarterly GDP of $1.33
trillion. Some forecasters believe that it’s only a matter of time before the world’s most populous nation also becomes the world’s most prosperous, by overtaking the US.

China’s rise — from an impoverished agrarian nation limping
along under a stridently-ideological dictatorship to the world’s leading
exporter and manufacturer — took just three decades. Today China’s infrastructure,
government, and workforce are significantly better-developed. The country’s
trade policies, currency valuation, lack of labor standards, and vestiges of a command economy give it some short-term tactical advantages over more liberal, market-oriented competitors in North America, Asia and Europe. China is capable
of operating at a scale that is inconceivable elsewhere in the world. What could
possibly go wrong?

One word: demographics.


Today, China has the world’s largest population, more than
1.3 billion. The median age is just over 34: slightly younger than the U.S.
(36.7), much younger than Japan (44.2), but also significantly older than other
emerging economies such as India (26.5) and Brazil (28.6).

That’s the good news. The bad news is that after 2016, China
will face the steepest aging curve of any large population in world history. By
2028, Chinese demographers predict that the population over 65 will exceed that
of the population under 15, and number in the hundreds of millions; by
mid-century, China’s average age will rise above 50. India’s is projected to
remain around 26.

These crooked numbers were created by China’s one-child
policy, initiated in the 1980s to bring the population under control. It
succeeded, and perhaps saved a growing China from starvation, but the “4-2-1
problem” (4 grandparent, 2 parents, 1 child) and a growing gender imbalance has
created a structural workforce aging issue even more severe than ones faced in
Europe and Japan.


Faced with a population of hundreds of millions of elderly
retirees dependent on a shrinking number of young workers, China is in a
desperate race to get rich before it gets old. The country’s much-maligned high
savings rate, which is starving the world economy of much-needed consumer
demand, is driven in part by the realization that demographic trends will
rapidly erode the country’s productive capacity.

We’ve already seen signs that China’s booming manufacturing
sector is running short of manpower. Employers are increasing
wages and offering unprecedented incentives to lure workers to more productive factory
jobs. China’s schools can’t produce qualified graduates quickly enough to fill
middle management and professional roles.

There’s a qualitative dimension to China’s demographic
conundrum as well. For a country so enterprising, it is not exactly entrepreneurial, and that too may be age-related.


Even today, despite hundreds of millions of talented,
highly-educated young people in its workforce, China does not exhibit the
personality of a young society. This is not just because of its aged leadership
and ancient culture. Its institutions are centralized and exert a powerful conforming influence over new ideas and new innovations.

 Billions of Entrepreneurs

In sharp contrast to the noisy and unruly market democracies that prevail in places like India, the Chinese government’s approach to technology appears motivated more by a desire to control the spread of ideas than to let the chips fall where they may. In his 2008 book Billions of Entrepreneurs, Harvard Business Professor Tarun Khanna notes that, in China, “the government is the entrepreneur.” Big investments are state-driven and many new ventures are financed through the machinations of China’s opaque financial sector.


The systemic aversion to risk, which is more characteristic of the graying societies of Europe and Japan than to the youthful nations of the emerging world, influences and inhibits the impact of entrepreneurship. Without that spark, China may be hard-pressed to compete on the basis of manufacturing muscle alone.

China needs to take some risks to maintain
its momentum in the face of demographic headwinds. But for a variety of
reasons, it seems disinclined to do so. The longer they attempt to grow along an unsustainable track, the more dramatic a change of direction
will be required to set them right. It is entirely possible that the greatest
threat in 2025 is not a China moving up to number one, but a China poised to
drop below more dynamic younger competitors.



About the author

Rob Salkowitz is author of Comic-Con and the Business of Pop Culture (McGraw-Hill, 2012), Young World Rising (2010), and two other books on youth and digital media as agents of change. He is Director of Strategy at MediaPlant, LLC, a Seattle-based communications firm he co-founded in 1999