Last Thursday on April 15, the general Shanghai and Shenzhen stock markets declined. However, the so-called “second-child concept stocks” rallied against the trend, mainly because of a working paper by the People’s Bank of China (PBOC, commonly known as the “central mother” in the mainland). On April 14, China’s internet was overwhelmed with a working paper issued by the PBOC entitled “Understanding China’s Population Transition and Counter-Measures,” setting a rare precedent for a working paper to flood the screen.
The viewpoint of this article is clear and easy to understand. The PBOC paper calls for “acknowledging that China’s population conditions have already changed and the population dividends which were once a source of convenience require the subsequent repayment of a debt. [China] must acknowledge that education and technological advances will find it difficult to compensate for population declines. To this end, there should be a comprehensive opening up of family planning policy to achieve long-term success, encouraging the willingness to reproduce, and pragmatically resolving the difficulties of women when it comes to pregnancy, childbirth, childcare and schooling.”
The paper is very comprehensive in its analysis of the historical and demographic systems of various countries, and provides an objective and profound perspective on known issues including high housing prices, pensions, health care and education. As a matter of fact, there is no shortage of demographers, economists and entrepreneurs who have raised concerns, such as the American demographer Yi Fuxian and the co-founder of Ctrip, James Liang. However, as part of the government, the central bank systematically issued a document calling for the full opening up of childbirth is still a big surprise. But if you think about it, the central mother’s unexpected move made perfect sense.
The paper points out that although the relationship between population and the economy is somewhat like that of commodity pricing, the difference is that population inertia is an intergenerational force that is much stronger and much longer than inflation and deflation. If you think of pricing as a car, then the population is the gas pedal that can neither be stopped nor activated. To use the mindset of regulating the economy to cope with the demographic transition will more than likely fail to meet expectations. Therefore, there must be plenty of initial lead, so as to avoid bad old habits.
First of all, the central bank is a talent-intensive department. The central banks of all countries are where the top experts in economics and finance converge, and the Chinese Central Bank is no exception. As far as I know, for more than 20 years, the entry requirement for general staff at the PBOC head office has been a Ph.D. or post-doctoral degree, and there has been a large number of returnee PhDs and professors. Basically, any debate concerning China’s central bank is a “guarantee win” argument. Among the most recent discussion was the proposal by Huang Qifan, then deputy chairman of the economic and finance committee under the National People’s Congress, to let China’s finance ministry play a key role in the management of its foreign exchange reserves, which is managed by the State Administration of Foreign Exchange (SAFE) and the PBOC. At the time, Huang himself confused the monetary base with narrow money and was pointed out immediately, and his proposal was shot down by top officials. Last year, the director of the Research Institute for Fiscal Science (RIFS) of the Ministry of Finance proposed to monetize the country’s fiscal deficit. The central bank struck back and even systematically criticized his argument based on modern monetary theory (MMT), which was not adopted by the two councils. However, except for the necessary pushback against a few highly influential “financial laymen,” the Chinese central bank has basically not made any strong inter-departmental accusations, so this was definitely a surprise.
Second, the central bank is acutely aware that the population issue is the greatest obstacle to China’s economic development in the medium to long term. There has been a consensus among educated people at home and abroad that the low fertility rate and the aging population will be the biggest concern for China’s economy in the future. In an interview with Voice of America (VOA) last month, Yi Fuxian once again clearly stated that “China’s economy will never surpass that of the U.S.” However, I thought at the time that it was not possible on a per capita basis, but perhaps at some point, it was possible on a total basis, however, I was disappointed after consulting with Mr. Yi. According to the data and models provided by Yi Fuxian, if China can stabilize its total fertility rate at 1.2, the total population will fall from the current 1.28 billion to 1.07 billion in 2050 and to 480 million by 2100. China’s working-age population has been decreasing since around 2014, and its median age, which had already surpassed the U.S. in 2018, is now 42 compared to the U.S. at 38. Although the PBOC’s paper does not directly reference Yi Fuxian’s data and theories, only drawing figures based on the National Bureau of Statistics and the United Nations’ economic data through 2019, it is evident that the economy and population are facing serious problems and the downward trend is difficult to be reversed. In recent years, there have been labor shortages and difficulty in recruiting workers even with wage hikes. Demographic problems have already had an adverse impact on the economy.
Thirdly, the central bank has the means but not the ability to solve the population problem. The main function of the central bank is to control inflation and formulate monetary policy. “High housing prices” are really the main reason that hinders young people from having children, plus the education issue of “liberal arts education is harmful to the nation,” as well as other problems such as social insurance, pension and health care. The central mother’s message reveals a resigned sense of humor, using an old-fashioned folk saying “father pokes one, mother pokes another,” with special emphasis on the fact that “educating a good mother is twice as effective as educating others.” The paper bluntly calls for promptly opening up while there is still the willingness to have children before it is too late.
It would be very beneficial to the nation, the people, and the economy if the authorities could use the same thunderous measures as they did with family planning to eliminate redundancies in the bureaucracy and use the money saved to encourage young people to have children.
(He Jiang-bing, Chinese academic in Financial Studies)
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