China Outline

China Recommendations China’s policy choices have ultimately resulted in the situation that the nation currently faces: a nation with a rapidly aging demographic with an increasing dependency ratio that can eventually cripple the country economically if measures are not taken to stem their breakneck pace. Compounding the issue is that China’s traditional social welfare has held long in history the untold responsibility that the younger generation will be caring for their elders.

However, the ramifications of their current status, of the aging population outpacing the younger working population, indicate that change needs to occur because the old methods of addressing the social and economic problems of their rapidly aging demographics will not suffice. In order to address some of these issues, it’s necessary to first identify a couple of key policies and issues that helped usher China into its current predicament. Historically, China had been reaping the rewards of its low dependency ratio for many years.

According to a June 2009 article of the, the 1980’s brought a decade of success and expected good pension due to the implementation of the one child policy and the Iron Rice Bowl care system that provided cradle to grave benefits. FAMILY POLICY The one child policy implemented in 1978 to ease some of the social and economic burdens during that time led to, currently, one of the lowest fertility ratios in the world. What does this mean? The low dependency ratio, currently 3:1 economically active adult to 1 dependent, helped thrust China into prosperity (The Economist, 2011).

However, between 2000-2010, the percentage of future providers decreased from 23 percent to 17percent. Experts anticipate that by 2050, the dependency ratio will drop to 2. 2:1, being one of the lowest in the world. Japan currently has a ratio of 2. 6:1 (The Economist, 2011). This trend in dependency ratio can’t be sustained with the current model of policies and has already brought a slew of different issues today as a result. Fiscal pressures as well as future healthcare and pension complicates the problems China faces.

In the past, China has always turned to their immediate family or extended family for support as they age. However, with decreasing family size, urbanization, worker migration, unemployment have led to the weakening family system as a social security for long-term care. With the increased life expectancy, the 4-2-1 problem, as it has been known to be called, refers to the social paradigm that the younger generation has with relation to their elders (i. e. 4 grandparents + 2 parents will rely on one offspring for future care).

The current funnel demography that has come to play also started a new small category of elderly: Three No’s – no children so they lack social support, no income and no ability to work” (The Economist, 2011). Thus, the shrinking family system has become a social and societal welfare issue as well, not just a family issue. SOCIAL POLICY When China was enjoying its decade of prosperity, it had not anticipated the changes that the 1990’s brought. Enterprise changes ground the prosperity to a halt when state enterprises shut down or privatized (Viswanath, 2012).

Urban workers, which used to comprise 80percent of civil servants/employees drastically decreased to 20percent. The Iron Rice Bowl pension scheme ended. Instead, a new 3-pillar pension scheme was introduced where the following paradigm was introduced: “basic pay as you go, funded individual accounts, and individual private savings” (The Economist, 2009). By the decade of 2000, the low birth rates, increased life expectancies, and shortage of migrant workers brought lifestyle and economic changes.

The China that used to enjoy a multigenerational support system for their aged now faces the reality that there’s not enough young people to support the aging demographics. As of 2009, the pension scheme covers only 1/3 of the population. The social welfare is currently separated into 2 separate subsystems – urban and rural where each has different benefits. Workers in the urban areas who work in publicly owned organizations enjoy benefits such as lifetime employment, pension, free healthcare, free housing, and subsidized food in work canteens.

In addition, there is a social welfare package for the impoverished introduced in 1993 called the Dibao which aims to minimize ”the gap between the recipient income and the local DB line” (World Bank, 2009). Other systems showing segmented distribution is in medical services where the rural areas only receive sparse and variable services. In 2002, the New Rural Cooperative Medical Service System was placed to provide a financial pool against serious diseases. The same is true for the pension system where only 60percent of rural counties are covered (Viswanath, 2012). POLITICAL

Currently, China has implemented its 12th Five Year Plan (FYP) where it attempts to restructure the Chinese economy by encouraging domestic consumption, developing the service sector, shifting to higher value-added manufacturing, conserving energy, and cleaning up the environment” (Casey & Koleski, 2011) To incorporate still a. 12th 5-year plan (2010-2015) “China's 12th Five-Year Plan (FYP), released in March 2011, attempts to restructure the Chinese economy by encouraging domestic consumption, developing the service sector, shifting to higher value-added manufacturing, conserving energy, and cleaning up the environment.

The 12th FYP prioritizes improving the population’s well-being by increasing wages, better educational opportunities, and improved healthcare * Three key aspects of the 12thFYP‘s industrial policy are (1) Focus on scientific development, (2) Government support for seven ? strategic emerging industries?, and (3) Construction of transportation and energy infrastructure.

However, some business leaders and academic experts are skeptical that the 12th FYP will solve China‘s structural problems, primarily due to the misalignment of central and local government priorities. ” (U. S.-China Economic & Security Review Commission, June 24, 2011) i. Seeks to establish social care system 1. “home based care as the foundation 2. backed up by community based services 3. supported by institutional care”

4. Law amendment making parental neglect punishable, similar to India. ii. “Socialising Social Welfare” (coined slogan by the Party) 5. Seeks active participation of NGO’s that are slowly taking root. 6. On the flip side, growing the social welfare sector provides a huge opportunity to move the economy from export-led growth to one led by domestic consumption—in this case, by expanding the service (i.e. social) sector.

7. With the recession of 2008 and the ongoing economic slowdown in China’s markets abroad, boosting domestic consumption has become an area that the Party has started to focus on. AREAS TO CHANGE * Pension System – adjust to cover rural as well as urban areas with more equity * Expand healthcare system (better coverage) * How to do these will be difficult without transferring financial burden to future generations but can be eased with increased growth rates above the international average

* Domestic Consumption

* Grow Labor Market Domestically – increase labor in social services to address the aging demographics OUTLINE FOR THE RECOMMENDATIONS I. Historically (Economist 6/25/09) Policy Issues to Address – Social and Political Wu Cangping – China to get old before getting rich (1980’s) a. 1980’s – good pension because china was rich due to the implementation of the one child policy & increasing life expectancy; Iron rice bowl care system (cradle to grave benefits) b. 1990’s – too good to last. i. State enterprises shut down or privatized; civil servants/employees used to make up 80percent of urban workers changed to 20percent.

Iron rice bowl is gone. ii. New 3 Pillar Pension scheme – basic pay as you go (employer/employee contribution), funded individual accounts (employer/employee contributions), individual private savings c. 2000’s – low birth rates, increased life expectancies, shortage of migrant workers, lifestyle changes d. 2009 iii. Pension – 1/3 population covered bay any pension scheme; 1. UBS China Specialist, Jonathan Anderson – unfunded liabilities up to 6percent GDP annually. How to get ahead: a. increase contributions/coverage – increases money influx into system b.

Increase retirement age – most effective; life expectancy has increased so it makes sense to increase retirement age. Problems: i. Socially opposition: 1. Employer/worker– mentally set on 50’s retirement 2. Workers in their 40’s considered old ii. Practical opposition 3. Workers in their 50’s may lack skills needed in modern age c. Secure better returns on accumulated funds d. Reduce future payouts iv. Social care facilities – rudimentary but need to increase to deal with increased aging demographics v. By 2050, China can expect a high dependency ratio 2. Median age = 45

Policies that helped usher China’s current situation I. Social b. One Child Policy (Economist 7/21/2011 – Illegal Children Will be Confiscated) iii. Led to the lowest fertility ratios in the world – what does this mean right now? 8. Low dependency ratio (3 economically active adult to 1 dependent) a. Between 2000-2010, future providers = 23percent which dropped to 17percent b. China now 8:1 economically active to over 65yo) c. By 2050, Drops down 2. 2:1 (Japan currently has 2. 6:1 (meaning not enough young people can support the aging populace economically/socially i.

Aside from fiscal pressures, additional consequences will include caring pressures. According to The Economist homes for elderly people in China care for only about 1percent of over-65s, a much smaller proportion than in the West. Added to China’s dwindling population of young, itself related to national population growth restrictive policies, creates what is typically referred to as the ‘4-2-1’ problem. That is, and given increasing longevity, a typical child of today being responsible for the caring of four grandparents and two parents in future. iv.

China has an invisible chain of social security 9. aging grandparents and parents turn to immediate family (child) or extended family for support that arises from the strong notion of filial piety. 10. Chinese parents, much like Indian parents, are roped in to look after grandchildren, as the parents play breadwinners. 11. Shrinking family size, decreasing fertility rates, eroding filial piety, increasing nuclear families, urbanisation, migration, unemployment and changing mores have led to a weakening of the family as a social security mechanism. 12.

This is said to be China’s demographic time-bomb—and, unlike any other developed country, makes China become old before it becomes rich. d. Small category of the “Three Nos” elderly—who lack social support (no children), have no income and lack the ability to work. Old age support has thus become a societal welfare problem—not just a simple family affair. c. Social Welfare (Financial Express 3/5/12) v. Segmented into 2 separate subsystems – urban vs rural (w/ different benefits) 13. Urban e. Publicly Owned Organizations – lifetime employment, pension, free healthcare, free housing, subsidized food in work canteens ii.

State-owned enterprises and collectively-owned enterprises f. Dibao – social welfare package (in 1993) iii. In urban areas, a social welfare package called dibao (minimum guarantee or DB) in colloquial Chinese has been in operation since 1993. According to the World Bank, this is one of the largest cash-transfers in the developing world. The aim of this programme is to close the gap between a recipient’s income and the local DB line, so that a minimum income is guaranteed. But stringent eligibility criteria, bureaucratic hurdles and shoestring benefits have made it a limited success. g.

Iron rice bowl – welfare system where state owned companies had cradle to grave benefits (housing, education, healthcare, generous pension scheme, official retirement age (55 – M, 50 – F) for manual workers and a replacement rate of 80percent of final salary. Most retired 5y prior to official age 14. Rural - sparse and variable (comes from egalitarian land distro where land was minimum guarantee)

15. “In rural areas, the New Rural Cooperative Medical Service System has been in place since 2002, a financial pool against serious disease led by the government, with funds coming from the government, collectives and beneficiaries.

China is seeking to establish a basic pension system in urban areas by 2012, whereby residents over 60 years can receive a monthly stipend; the same is to be applicable in rural areas by 2020. According to official statistics, the pension system covered 60percent of rural counties by 2011” II. Other Policies d. 12th 5-year plan (2010-2015) “China's 12th Five-Year Plan (FYP), released in March 2011, attempts to restructure the Chinese economy by encouraging domestic consumption, developing the service sector, shifting to higher value-added manufacturing, conserving energy, and cleaning up the environment.

The 12th FYP prioritizes improving the population’s well-being by increasing wages, better educational opportunities, and improved healthcare * Three key aspects of the 12thFYP‘s industrial policy are (1) Focus on scientific development, (2) Government support for seven ? strategic emerging industries? , and (3) Construction of transportation and energy infrastructure.

However, some business leaders and academic experts are skeptical that the 12th FYP will solve China‘s structural problems, primarily due to the misalignment of central and local government priorities. ” (U. S.-China Economic & Security Review Commission, June 24, 2011) vi. Seeks to establish social care system

16. “home based care as the foundation 17. backed up by community based services 18. supported by institutional care” 19. Law amendment making parental neglect punishable, similar to India. vii. “Socialising Social Welfare” (coined slogan by the Party) 20. Seeks active participation of NGO’s that are slowly taking root. 21. On the flip side, growing the social welfare sector provides a huge opportunity to move the economy from export-led growth to one led by domestic consumption—in this case, by expanding the service (i.e. social) sector.

22. With the recession of 2008 and the ongoing economic slowdown in China’s markets abroad, boosting domestic consumption has become an area that the Party has started to focus on. Addressing the above issues on family planning, social welfare, domestic consumption, and focusing on domestic social services will help address some of China’s issues of getting older before they get richer.. - Pettis Outline I. CHINA’S PROBLEMS * China Economy – now based on investment driven growth model. PROBLEM: This only works in certain markets.

* Investment driven growth model (decrease consumption = increase savings) * It isn’t that the Chinese are saving so much as the income is so low that they’re forced to be frugal * If investment is external (out of the country) = decrease savings * FLIGHT CAPITAL – nebulous idea that money is exported out of country. Indicator of businesses actions/thoughts * PROBLEM: EXCESSIVE SAVINGS (due to old policies constraining consumption + current model) A. Important questions & items 1. How does excessive savings constrain growth? - China relies only on outside investments for growth.

2. When did investment become not viable? - Investing good if wealth increase > capital currency(? Need to check this) 3. Why is Chinese savings rate highest? a. More as a result of lowest consumption because Household income is so low (50percent). b. GROWTH MODEL transfers wealth from household to subsidies 4. What happens with misallocating investment and paying with loans? - Debt increase > Debt servicing capacity - Non-liquid assets; must decrease investments B. How do you fix this? **Decrease investment BUT how do you do this if it’s the only growth source?

** 1. THEORY: Replace Growth Source. How? a. Increase consumption to replace for decrease investment b. How do you increase consumption? i. Low Growth Rate (Japan model, and it worked) 1. Increase household income > GDP (ie decrease state share of wealth) 1. How do you grow the economy? c. GDP collapse by undervaluing RMB through growth consumption tax on importers ii. INCR export competitiveness iii. DECR consumption d. INCR household income go to taxes e. “Financial repression” interest rates set low by Chinese Central Bank iv.

Financial repressions - gov’t method to get money back to itself to liquidate debt v. This would remove wealth from household incomes and subsidize manufacturers and government II. FOUR WAYS TO SOLVE A. RAPID Increase Income Rate / Increase interest rate / Increase wages 1. Immediate effects: Decrease small/medium enterprise, bankruptcy 2. RESULTS: Initial increase unemployment but eventually… economic rebalance with incr jobs/growth B. SLOW increase of the above factors 1. This would have worked 7-8 years ago. 2. Will take 2-3 years of waiting before seeing significant economic effects 3.

RESULTS: Accumulate/Increasing imbalance as they try to play catch up. C. Increase Household Share of GDP: PRIVATIZATION 1. Transfer wealth from State assets to household public via Privatization of state assets 2. Wipe out debt then they can raise interest rates a. Problem with Privatization: Land ownership change will encounter resistance from powerful families owning state assets b. Russia did the same: bought off discontent via bribery D. Debt Absorption (Japan’s approach) 1. State takes over private sector debt (Bailout)

2. Advantage: Not taking away assets

3. Disadvantage: As gov debt increase, interest rate can’t increase. However, it still has to equalize driving the undervaluation of currency via Financial Repression Tax a. Financial Repression Tax – interest rate set by central bank vs. market. Artificial rate set by central bank (transfers debt from household to net borrowers). This leads to household income increasing which = increase consumption. b. Good for growth BUT only in economic activity… not in wealth. Bad for household sector. * What’s the alternative? Devalue RMB to gain export competitiveness?

BAD because this decreases household consumption. Slow external sector needs to increase quickly. * All options will decrease export competitiveness. What has to happen is a redistribution of wealth - Privatization. The solution(s) chosen will have different winners and losers in the economy. * Winners along different solutions: * Increasing RMB – helps net importers (big guys/state) * Increase wages – helps workers and small enterprise * Increase interest rates – Household saves. Helps middle class. Standby for follow on with pros and cons of the 4 solutions *