China's Demographic Challenge

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- By the mid 1980s economic forecasts were clear -- Japan would soon be the world's most powerful economy. But that never happened. Japan's stock index, the Nikkei 225, closed 1989 at 38000. Today, 23 years later, the Nikkei sits at 9600 -- a 75% drop.

There are myriad reasons for Japan's economic collapse. But, Henry W. Dent of the HS Dent Foundation claims that there is a near-consensus among demographers that the root cause of Japan's inability to recover has been its demographic collapse. Between the end of World War II and 1950, Japan's fertility rate (i.e., the number of children born to one woman) was 4.5. By 1989, that fell to 1.6. Today's fertility rate is 1.2. A fertility rate of 2.1 is required to maintain the population.

Falling fertility rates increase the age of a population and aging affects economic growth. Demographers have learned that, in developed countries, spending peaks at about 48 years old. Through the 1990's as Japan's average age surpassed 48, consumer spending fell. Consumer spending drives corporate earnings and corporate earnings drive stock price growth. In the '90s the stock market inflows of the '70s and '80s reversed. Real estate markets dried up from lack of investors and new-home owners. China may be headed for the same fate.

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In 1978, China's one-child policy was established. Although actual implementation varies by location, the policy's objective is to control population growth by restricting each family to one child. A 2008 survey undertaken by the Pew Research Center found that 76% of the Chinese population supports the policy. Also in 2008, China's National Population and Family Planning Commission said that the policy will remain in place for at least another decade.

Although a reduction in the number of countrymen will be a welcome relief for most Chinese, there are also negative side effects. The first is a potential Japan scenario of reduced consumer spending, a stressed equities market and a long, slow decline of real estate prices.

The second negative side effect is paying for all the retirees. The Chinese culture adheres to the Confucius tradition of filial piety -- children are forever indebted to their parents and must take care of them in their old age.

But the one-child policy creates a difficult situation. Let's say a couple marries and has their first child at 28 years old. This will make their parents about 53 years old with a life expectancy in China of 73 -- a 20-year period during which the young couple could be responsible for them. Further complicating this situation is that in the new economy, the skills of the current late adult generation have become obsolete by their early 50s.

Around 1967, at the beginning go the Cultural Revolution, the universities closed. In 1977, the universities slowly began to open. Thus, almost no adults in their mid-50s or later have college degrees. And few know the computer technologies required for today's economy.

This means that for 20 years, most couples must take care of themselves, their new baby, and four retired grandparents -- two workers must support seven people. And four of those people are likely to have major medical expenses.

China does not and cannot have a social welfare like the U.S. It must depend on families to take care of each other. If these family traditions break down, society will break down.

The Chinese government is attempting to maintain the filial piety tradition by fiat. Couples who do not take care of their parents can now be tracked down in the same way that the U.S. tracks down deadbeat dads.

But the question remains, "What will be the impact of the one-child policy on China?" How will reduced consumer spending affect economic growth? What will happen when filial obligations overwhelm family budgets; will couples claim "bankruptcy" and walk away? And what are the social implications of having three married couples living under one roof; or six people raising one child?

Like Japan, China will face many headwinds in the future. Trends don't last forever.

Hall is managing director of Human Capital Systems (www.humancapitalsystems.com), a firm that designs systems for improving workforce performance. He is also an instructor in Duke Corporate Education's teaching network and author of The New Human Capital Strategy. Hall was formerly a senior vice president at ABN AMRO Bank in Amsterdam and IBM Asia-Pacific's executive in charge of executive leadership and organization effectiveness. During his tenure, IBM was twice ranked No. 1 in the world in Hewitt/Chief Executive magazine's "Top Company for Leaders." Hall completed his Ph.D in industrial-organizational psychology at Tulane University, with a dissertation on people management practices of Japanese corporations.

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