Age wave to come crashing soon over China's economy

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - As if Chinese policymakers did not have enough on their plate, they will soon have to grapple with the unprecedented challenge of a country that is growing old before it gets rich.

Many countries are turning grey, but Western experts are worried that Beijing is unprepared for the sheer speed at which the world's third-largest economy will age: on UN projections, China's working-age population will peak in 2015 and plunge by 23 percent by 2050.

By then, there will be 438 million Chinese aged 60 or over, or 61 for every 100 adults of working age, up from just 16 in 2005.

A report released last week by the Center for Strategic and International Studies says the economic and social stakes are so high that China's leaders, though in the midst of a financial crisis, cannot afford to delay needed policy changes.

"How China navigates its coming demographic transformation will go a long way toward determining whether it achieves its aspiration of becoming a prosperous and stable developed country with an expanding role in the global economic and political order," the study by the Washington think-tank says.

Its core concern is China's rudimentary pension system, which is characterized by vast unfunded liabilities, empty accounts and low coverage.

As the CSIS report notes, today's developed nations were all affluent welfare states by the time they aged. By contrast, China is still a poor country that has not had the time to accumulate the wealth needed to pay for comprehensive retirement protection.

Just 31 percent of the Chinese workforce, mainly in the state sector, now receive a public pension. Most of the fast-growing private sector is excluded, as is the vast population of migrant workers. As for rural China, pensions are virtually non-existent.

So hundreds of millions of elderly citizens will have to fall back on their shrinking families at the very time when the boost to growth and incomes from the demographic dividend of an expanding labor force goes into reverse.

In the 30 years since China embarked on economic reforms, the growth of its labor force has added 1.8 percentage points a year to gross domestic product growth.

By the 2030s, in contrast, the shrinkage of its working-age population will be lopping 0.7 points a year off growth, according to CSIS's projections.

Many protests in China are already sparked by unpaid pensions, and the CSIS said that without an effective retirement policy, the social stability that is one of the pillars of the government's legitimacy could eventually be undermined.

"Not just a retirement crisis, but also a more general social and economic crisis may loom in China's future," the report said.

RACE AGAINST TIME

More broadly, rapid aging will threaten China's hegemony in low-end manufacturing by pushing up labor costs, economists say.