With chilly headwinds blowing through a number of sectors, the global economy is undoubtedly entering a downward cycle. More disturbing, though, is the slack emanating from an aging society that is posing a headache to countries of the world. China is no exception, with its population bonus expected to dry up around 2015. Ha Jiming, chief economist at China International Capital Corp. Ltd., discussed these issues in an article recently published in the Shanghai Securities Journal. Edited excerpts follow:
Over the long term, economies throughout the world, especially the developed countries, will be confronted with a handful of challenges.
One concern looming over the developed countries is that their economies are heading for a prolonged recession. To cushion the economic shock, they have resorted to zero interest rates and quantitative easing, whose effects have so far turned out to be invisible. For example, the broad monetary supplies of the United States have been soaring in recent months, but its economy is still in a slump.
In another move, the deep downturn has forced Western governments to take on heavy debt in a bid to sustain their massive economic bailouts. But repaying these debts may require higher tax rates, putting a damper on the already anemic economy. In addition, the marked easing in global finance has sowed the seeds for future inflation.
By 2010, most developed countries will have to deal with the problems of an aging population. Labor shortages and heavier taxes will put a huge drag on economic growth and government solvency. While the current U.S. economic gloom is more a result of the financial debacle, the future downturn will have its roots in the country's social and population structures. In coming years, the U.S. economy may grow at 1 to 2 percent year on year, well below the 3- to 4-percent growth it enjoyed in the past.
For China, the boom times of double-digit growth rates may never come back since the population bonus is expected to fizzle out around 2015. The rising cost of labor and the deceleration of urbanization are its biggest stumbling blocks.
The country's current top priority is how to make up for the decline in exports and put economic growth back on a more sustainable footing. The following are three options to widen the source of growth.
First, step up measures to spur consumption and expand domestic demand, such as lowering taxes and improving social security systems. To offset the squeeze on its balance sheet, the government can issue bonds to overseas investors.
Second, China needs to widen the channels for private investment and the private sectors as it did 10 years ago. In 1998, the country opened up its real estate sector, boosting investment in property-related industries like iron and steel, cement and coal. Now it's time to revamp the pricing regime of key resources and allow more private capital into state-controlled sectors such as medical service, education, media, railways and electricity. This would add fuel to the investment boom, and at the same time create more jobs.
Third, to warm up the economic climate, it is also imperative for China to accelerate the urbanization process before the aging population problem slows it down.