Morningstar Magazine - December 2017/January 2018 - 45

EXHIBIT 2

deteriorate further, bad debt will continue
to accumulate, and productivity growth will come
under added pressure.

Demographic Transition China's still-high support ratio will decline over the next
10 years.
China

The Demographic Window of Opportunity Is Closing
Finally, China's "demographic dividend" has
been spent: After nearly doubling in size since
1980, the country's working-age population
is now shrinking, reducing the savings available
to fund productivity-enhancing investments.
China's family planning laws triggered a premature
drop in fertility. From 1970 to 1980, China's fertility
rate plunged from 5.7 to 2.6 births per woman,
an unprecedented decline for what was still a poor,
largely agrarian country. While that led to an
immediate slowdown in population growth, the
working-age population continued to expand, from
582 million in 1980 to nearly 1 billion by 2010.
Over that time, China's support ratio-the number
of working-age adults for every child and
senior- surged from 1.5 to 2.9. As theory would
predict, China's household savings rate surged,
facilitating rapid (and, for a long time, productivityenhancing) capital accumulation.
Low fertility prematurely closed China's
demographic window of opportunity.
The working-age population has begun to contract.
The demographic support ratio, while still high,
has begun to slip ( E X H IB IT 2 ), and so too has the
household saving rate. Over the next 10 years,
China's support ratio will fall further, from 2.7 to
2.3. For every 10 dependents, China will have four
fewer working-age adults than it does today.
The household savings rate is likely to fall further,
draining the pool of funds available for investment.
Without major structural reforms, borrowing
by local governments and state-owned enterprises
would increasingly crowd out private enterprises,
economywide returns on investment would
continue to deteriorate, and productivity would
falter further.
How Much Further Will Productivity Growth Fall?
China's economy will soon run out of the cheap

Support Ratio

Other Countries

3.0

2016
2000

2026
2.5

2.0

1.5
Bubble size represents population.
0
10,000
20,000
30,000
40,000
GDP Per Capita Based on Purchasing Power Parity (Current International, $)

1.0

50,000

Source: Morningstar.

fuel that kept it flying high for so long,
complicating Beijing's efforts to keep growth aloft.
Over the next 10 years, technological progress
will decelerate as firms must innovate rather than
imitate, urbanization will slow as the rural labor
surplus is exhausted, returns on capital will
deteriorate as overinvestment makes high-return
projects ever scarcer, and the country's
demographic window of opportunity will close.
Productivity growth is likely to slow from its recent
pace of about 2.3%, dragging GDP growth
down with it. But by how much? History offers
some clues. Over the past five decades, the typical
country at China's rung on the income ladder
generated 0.7% average productivity growth in the
subsequent 10 years. Notably, less than one fourth
of those countries enjoyed the 2%-plus annual
gains implicit in consensus forecasts for China.
More ominous is the possibility that productivity
growth utterly stagnates-roughly one third of
countries at China's income level saw flat to
negative productivity growth for an entire decade.
Academic research suggests flatlining productivity
is especially common among previously fastgrowing middle-income countries,7 a phenomenon

that World Bank economists Indermit Gill and
Homi Kharas coined the "middle-income trap."
Stagnating productivity among middle-income
countries explains why comparably few ultimately
become high-income countries. Among the
96 countries categorized as low- or middle-income
in 1960, only 12 non-OPEC members eventually
graduated to high-income status. This is the leap
China aims to make, which would involve more
than doubling GDP per capita from today's level.
Worryingly for China, the historical record suggests
that it may be getting harder for middle-income
countries to ascend to high-income status.
Of the 12 non-oil middle-to-high transitions since
1960, only four have occurred in the past 30 years:
Taiwan, Ireland, Spain, and South Korea.
Just as many middle-income countries fell back
to low-income status over the past 30 years
(Nigeria, Nicaragua, Barbados, and Jamaica). In
our next article, we will gauge the risk that China
falls into the middle-income trap. K
Dan Rohr, CFA, is chair of the China Economics Committee
with Morningstar Research Services.

7 See, for example, Eichengreen, B., Park, D., & Shin, K. 2012. "When Fast-Growing Economies Slow Down," Asian Economic Papers.

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Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018