China’s Age of Abundance: An Update

WANG Feng, Fudan University and University of California, IrvineSHEN Ke, Fudan UniversityLI Ding, Renmin University

Yong CAI, University of North Carolina

NTA Global Conference, Beijing, China, November 10-14, 2014

Introduction

• China’s Age of Abundance: When Might it Run Out?

Background

• Previous work using NTA methodology revealed:

– Rapid income growth, savings, and moderate consumption levels result in an sizable life-cycle surplus

– In comparison to population age structure/aging, changes in the economy, especially consumption level, are the main drivers for life-cycle surplus

– Between the two time points of last exercise, 2002 and 2007, substantial changes in income and consumption were already evident

Sizable Surplus, but Shrinking

Income Increase Outpaces Consumption, especially among the young

What Happens When Income Increases: Taiwan as a Reference

50%

60%

39%

Consumption is the Key

• Even with rapid population aging, keeping consumption share at 2002 level will not exhaust life-cycle surplus (bottom lines)

• Raising consumption share to 0.50 could exhaust surplus in the middle of 2030s

• Raising consumption level above 0.55 could exhaust surplus in the next 10 years

2000

2010

2020

2030

2040

2050

2060

2070

2080

2090

2100

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.301. LCD 2002 (C=.39) 2. LCD 2002 (C=.50) 3. LCD 2002 (C=.55) 4. LCD 2002 (C=.60)5. LCD 2007 (C=.39) 6. LCD 2007 (C=.50) 7. LCD 2007 (C=.55) 8. LCD 2007 (C=.60)

Year

Billi

on, A

vg. l

abor

inco

me,

30-

49

Rationales for Updating

• Further changes in income and consumption patterns between 2007 and 2009

• Newly available micro-level data (CFPS 2010)

• Financing life-cycle deficit

• Revised population projections

Rapid Economic Growth(Per capita income, current international $, PPP)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

2000

4000

6000

8000

10000

12000

14000

3466

6682

8138

11904

GDP per capita, PPP (current international $)

Source: World Bank

Continued Rise in Labor Income(in 2002 price)

0.0 4.0

8.0 12.0

16.0 20.0

24.0 28.0

32.0 36.0

40.0 44.0

48.0 52.0

56.0 60.0

64.0 68.0

72.0 76.0

80.0 84.0

88.0 0.0

5000.0

10000.0

15000.0

20000.0

25000.0

Income 2002 Income 2007 Income 2009

per C

apita

labo

r inc

ome

(RM

B)

• In two years, average income rose by 17.5%, in contrast to 43.1% in the previous 5 years

• Shift in peak earning ages started to return “normal”

• Largest increase in absolute value still among the relatively young

Consumption Increase Outpaces Income Increase

0.0 5.0

10.0 15.0

20.0 25.0

30.0 35.0

40.0 45.0

50.0 55.0

60.0 65.0

70.0 75.0

80.0 85.0

90.0 0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

Consumption 2002 Consumption 2007 Consumption 2009

Per c

apita

val

ues o

f con

sum

ption

(RM

B)

• In two years, average total consumption rose by 38%, in contrast to 40% in the previous 5 years

• Fastest increase found among aged 18 to 26, with an increase of 50% or more in 2 years

• Fast increase also found in late 40s

Where Does Consumption Increase?

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 900.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

7000.0

8000.0

9000.0

Education Health Care Other

Per c

apita

val

ues o

f con

sum

ption

(RM

B)

• Pre-school and higher education in early life

• Health care in old age

• “Other consumption” in adult ages

Changes in Life-cycle Deficit

0 5 10

15 20

25 30

35 40

45 50

55 60

65 70

75 80

85 90

(20000.0)

(15000.0)

(10000.0)

(5000.0)

0.0

5000.0

10000.0

Deficit 2002 Deficit 2007 Deficit 2009

Per c

apita

val

ues o

f life

cycle

defi

cit (R

MB)

• Substantial increase in deficit in early ages

• Continued expansion in surplus among adult ages

• Little increase in deficit in old ages

• Starting age of surplus shifted from 21 in 2007 to 23 in 2009

• Ending age of surplus shifted from 59 in 2002 to 57 in 2007 and 2009

Financing Life-cycle Deficit(Per capita, 2009)

0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

Public Net transfer Private net transfersPublic asset-based reallocation Private asset-based reallocation

Per c

apita

val

ues (

RMB)

• Early age (0-22) deficit financed by public (38%) and private transfers (46%)

• Among peak earning aged (30 to 49), 28% of surplus went into public transfer, 33% went into private transfers, and 33% went into private asset-based reallocation

• Among older adults (60+), 60% financed by public transfers, 34% by private transfers

Financing Life-cycle Deficit(Aggregate, 2009)

Age 3 7 11 15 19 23 27 31 35 39 43 47 51 55 59 63 67 71 75 79 83 87

-4000

-3000

-2000

-1000

0

1000

2000

3000

Public Net transfer Private net transfersPublic asset-based reallocation Private asset-based reallocation

Aggr

egat

e va

lues

(Mill

ion

RMB)

• Overall large aggregate surplus due to favorable age structure

• Life-cycle deficit among the old not yet a major concern

• Life-cycle deficit mostly concentrates among the young

Projection of Population Aging(Percentage of 60 and above)

Our new projection (TFR 1.5 and higher life expectancy) shows faster aging than UN Medium scenario, and is closer to the Low Fertility scenario, with 38 ％ instead of 34% elderly in 2050.

2010 2020 2030 2040 20500.0

10.0

20.0

30.0

40.0

UN 2010 High Fertility

UN 2010 Medium Fertility

UN 2010 Low Fertility

New Projection Medium Fertility

38%

34%

Effects of Population Aging(Projected with 2009 profile, 2030 population)

0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88

-5000.0

-4000.0

-3000.0

-2000.0

-1000.0

0.0

1000.0

2000.0

3000.0

4000.0

LCD2009 LCD2030

Aggr

egat

e va

lues

(mill

ion

RMB)

• Significant shrinkage in surplus, 35% by 2030

• Decreasing deficit in young ages due to projected low fertility (TFR 1.5)

• Deficit grows in old ages, especially very old ages

Effects of Population Aging(Projected with 2009 profile, 2050 population)

0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88

-5000.0

-4000.0

-3000.0

-2000.0

-1000.0

0.0

1000.0

2000.0

3000.0

4000.0

LCD2009 LCD2050

Aggr

egat

e va

lues

(mill

ion

RMB)

• Virtual disappearance in surplus, reduced by 98% by 2050

• Substantial drop in deficit in young ages due to low fertility (TFR 1.5)

• Large deficit in old ages, especially very old ages, will expand rapidly

Rising Consumption Share

0 4 8 12

16 20

24 28

32 36

40 44

48 52

56 60

64 68

72 76

80 84

88 0.000

0.200

0.400

0.600

0.800

1.000

1.200

1.400

Income 2002 Income 2007 Income 2009Consumption 2002 Consumption 2007 Consumption2009

• Rising consumption level is not taken into account in the previous projections

• Share of consumption did not change between 2002 and 2007, at 39%. It increased noticeably between 2007 and 2009, to 43%

• Combined, rapid population aging and rising consumption could exhaust China’s life-cycle surplus sooner than expected

Challenges of a Slower Growth Era

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Growth Rate of Real GDP Growth Rate of Revenue

• China is coming to an end with its hyper economic growth, with growth rate dropping from over 10% to below 8% in the last few years

• Government revenue, which was growing at a rate almost twice of the economy, has shown an even more precipitous drop

• Slow growth in economy and especially government revenue could pose further challenges to social welfare programs and public transfer

Conclusions

• China’s continued economic growth and social changes are leading to rapid changes in income and consumption

• The two years between 2007 and 2009 show significant new changes, especially in consumption

• Changing consumption combined with (faster) population aging could quickly exhaust China’s current large surplus

• End of China’s hyper-growth era could add challenges to financing life-cycle deficit