China’s Demography and its Implications

IMF Working Papers, March 28, 2013

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China will experience a notable demographic transformation, with its old-age dependency ratio doubling to 24 percent by 2030 and rising even more precipitously thereafter.
The paper reassesses national savings behavior using the permanent income hypothesis, giving greater prominence and more careful consideration to the role played by changing demography.
The analysis uses a forward-looking and dynamic approach that considers the entire population distribution rather than relying on static dependency ratios.

Framework: Permanent income hypothesis applied to national savings behavior.
Approach: Forward-looking and dynamic, considering the entire population distribution.
Empirical assessment: The forward-looking framework holds up well empirically and may be superior to static dependency ratios typically used in the literature.

Old-age dependency ratio: doubling to 24 percent by 2030 and rising even more precipitously thereafter.
Simulated global savings behavior based on the framework yields:
- China’s demographics should have induced a negative current account in the 2000s.
- China’s demographics should have induced a positive current account in the 2010s given the rising share of prime savers.
- China’s simulated current account only turns negative around 2045.
- The opposite simulated pattern holds for the United States and Western Europe.
Observed divergence: The observed divergence in current account outcomes from the simulated path appears to have been partly policy induced.
Convergence outlook: Over the next couple of decades, individual countries’ convergence toward the simulated savings pattern will be influenced by their past divergences and future policy choices.

Policy choices have materially influenced deviations from demographic-driven simulated savings and current account paths; future policy decisions will continue to shape convergence toward simulated patterns.
Implications for policy design should consider dynamic, age-structure-sensitive savings behavior rather than static dependency measures.

Growth model: China’s changing demography has implications for the growth model (reviewed briefly).
Pension system: Demographic changes have consequences for the pension system (reviewed briefly).
Labor market: Demography affects the labor market (reviewed briefly).
Public finances: Demographic trends have implications for public finances (reviewed briefly).