‘Demographics may not be destiny, but for students of geopolitics, they come close,’ writes AEI’s Nicholas Eberstadt.

• ‘Over the past two generations, China has seen a collapse in fertility, exacerbated by Beijing’s ruthless population-control programs. The one-child policy, introduced in 1979, was ended in 2015, but the damage had already been done.’
• ‘Its working-age population has already been shrinking for the past five years, and it is set to decrease by at least 100 million between 2015 and 2040.’
• ‘As China’s working population slumps, its over-65 population is set to explode.’
• ‘Under the one-child policy Chinese parents often opted for an abortion over giving birth to a girl, creating one of the most imbalanced infant and child sex ratios in the modern world. In the years ahead, China will have to deal with the problem of tens of millions of surplus men, mostly from disadvantaged rural backgrounds, with no prospects of marrying, having children, or continuing their family line.’

For anyone who follows China, none of this is news.

• Interesting, but so forward looking - ‘years ahead’ or ‘2040’ - that it's not especially useful for understanding what’s happening in China today.

But if you know where to look, you can see the immediate impact of demographics on China.

• Consider this from Columbia’s Shang-Jin Wei’s presentation at one of our recent CHINARoundtables:

‘In the long-term, demographics is one of the most important forces that will shape the growth momentum of China for the next decades. Two demographic features that are especially worth paying attention:’

• ‘First, China’s population is old-people-heavy and getting heavier over time, while the growth rate of the working-age population and the population overall is declining – that’s well-understood as are the impacts.’
• ‘Second, but less understood, is China’s gender imbalance – and its profound impact on business and economy, as well as housing prices, asset prices, and so on.'

On this second, less understood, point: Thanks to the ‘One Child Policy’ that began in the 1980s and selective abortion in favor of boys, one out nine young men won’t find mates.

• So parents pitch in to be sure it won’t their son who is left standing when the music stops in this marital musical chairs.
• Knowing that there are no wealthy involuntary bachelors, they work harder, save more, consume less, invest more.
• That's demographics at work right now.

Besides just accumulating wealth, parents of sons’ primary objective is to provide them with their own homes when they marry – because in today’s China: no home, no wife.

• According to Dr. Wei’s latest research, this accounts for one-third of the rise in housing prices over the past couple of decades.
• And a similar logic applies to other assets as well.

I’ve excerpted, just below, the parts of Dr. Wei’s presentation on demographics given at the CHINARoundtable  – you’ll find it’s a powerful window to understanding key aspects of the Chinese economy.

• (If you would like to read his full presentation that covers much more than demographics, as well as the insights from the CHINARoundtable participants, you’ll find a full transcript following my summary and on the CHINAMacroReporter website.)

To start us off, I begin with my first encounter with the importance of an apartment to a Chinese woman.

1 | Divorce, Chinese-Style

One morning, some years ago, my secretary came into my office in Beijing and told me she was getting divorced.

• From all she had told me before I thought she had a pretty good marriage. So I asked her what had happened.

The reason, she said, was simple: She wanted a bigger apartment, and a man who had one wanted to marry her.

• She got a divorce and married the bigger apartment.

Had my secretary been a cold-hearted, material girl (which under the circumstances I guess she was), I wouldn’t have been surprised.

• But she was an otherwise warm and all-round caring person.

So I wondered: Is this a one-off, or is it some sort of trend in Chinese society that, as a foreigner, was beyond my understanding?

• At the time, I chalked it up to the former.

Now a couple of decades later, I see it as the precursor of the latter – a societal trend where potential wives (and their families) put an outsized value on potential husbands’ owning a home.

• No home, no wife.

2 | The Mother-in-Law Factor

‘A recently developed social norm is that the family of a groom is supposed to supply a house in rural areas or an apartment in cities for the young couple before the marriage,’ writes Shang-Jin Wei and two co-authors in the 2017 scholarly article, ‘Home ownership as status competition: Some theory and evidence.’

• ‘A survey of mothers with a daughter in eight major cities by China Economic Daily in March 2010 reported that 80% of the respondents would object to their daughter marrying a young man who can only rent rather than own a home.’
• ‘This prompts the headline that “it is fundamentally true that mothers-in-law (mothers of wives) are pushing up the housing prices.” ’

According to Dr. Wei’s latest research, this accounts for one-third of the rise in housing prices over the past couple of decades. And also for:

• An increase in savings rates,
• Lower consumption, and
• More investment.

The question: How are mothers-in-law able to require that suitors provide a home as a condition of marriage?

• The answer: Demographics – especially China’s gender imbalance.

3 | The Drivers of China's Growth Momentum

Shang-Jin Wei began his presentation at the CHINARoundtable putting demographics as an economic driver into context:

• ‘Since returning to teaching at Columbia Business School after serving as Chief Economist at the Asian Development Bank, I have been working to decipher the forces of China’s growth momentum. And I have found:'

‘In the short-run, the driver is China’s domestic policies – and the reversal of those policies.’

• ‘In the last year and a half, we have seen a spate of government actions all contributed to not just falling stock prices for companies in certain sectors but a deterioration in investor sentiment more broadly – we are starting to see and easing of the way regulations and rules and laws are implemented.’

‘Also, in the short-run, on the monetary and fiscal sides, we are seeing looser monetary policies, perhaps complemented by future fiscal policies.’

• ‘On the monetary side, there's some push to inject more liquidities to the system. Just a couple of weeks ago there was a reduction in required reserve ratio.’
• ‘On the fiscal side, there's a formal directive from the prime minister to look into ways to accelerate infrastructure investment. This is something the Chinese government thinks it is good at using, although it now brings diminishing returns.’

‘In the medium-term, it’s geopolitics – note here that the U.S. notion of decoupling to attain supply chain resilience and the Chinese strategies of ‘dual circulation’ and self-sufficiency share some important commonalities.’

• ‘First, each has the effect of reducing dependence and interdependence in specific sectors that each country considers crucial.’
• ‘Second, these policies can make future decoupling and the reduction of interdependence less costly for each side. The more you reduce the interdependence today, the less costly it becomes to take the next step. These actions can be self-reinforcing – and that’s a risk.’

‘In the long-term, demographics is one of the most important forces that will shape the growth momentum of China for the next decades. Two demographic features that are especially worth paying attention:’

• ‘First, China’s population is old-people-heavy and getting heavier over time, while the growth rate of the working-age population and the population overall is declining – that’s well-understood as are the impacts.’
• ‘Second, but less understood, is China’s gender imbalance – and its profound impact on business and economy, as well as housing prices, asset prices, and so on. I will focus today on that impact.’

4 | Unintended Consequences

‘With regard to gender imbalance, China, compared to other countries - certainly other countries at a comparable development level - has more males than females.’

• ‘This is very uncommon because, absent other factors, women outlive men – and thus there are more women than men.’

‘China’s peculiar gender structure does not come from the fact that men live longer - Chinese women also outlive Chinese men.’

• ‘Instead, it comes from the fact that, at birth, there are more boys being born than girls.’
• ‘This is a consequence of gender-selective abortions brought on by the strict family planning regulations that began in the 1980s - the ‘One Child Policy’ - running into the Chinese traditional preference for boys.’

‘This family planning policy has generated a combination of intended outcomes and unintended outcomes.’

‘The intended outcome is a reduction in the birth rate.’

• ‘But this has led to fewer people entering the labor force at the same time parents, grandparents, and grandparents' colleagues are retiring.’

‘An unintended outcome is the gender imbalance, and this, as we will see, has led to:

• ‘Higher savings rates and lower consumption.’
• ‘And higher asset values, especially for residential real estate

‘In fact, the gender imbalance accounts for about one-third of housing price increases in the past couple of decades.’

5 | Why the Outsized Impact?

‘Why does gender imbalance have such an outsized impact on China’s housing prices?’

• ‘If you look at the dating and marriage market - let's say for the 15- to 35-year-old cohort - the young man to young woman ratio is about 115 or 116 men per 100 women.’
• ‘This means that one out nine young men won’t find mates.’

‘Parents know this is a competition, and they ask themselves what they can do so that their son can avoid being an involuntary bachelor.’

• ‘They want to make sure their son will be ranked in the dating and marriage market - and will be ranked sufficiently ahead of other men to win a bride.’
• ‘They know that one of the important sorting variables is wealth - there are no wealthy involuntary bachelors.’
• ‘So they work harder, get a second job, a third job, look for potentially higher risk, higher return jobs, become entrepreneurs; save more; consume less; invest more.’

‘But it's not just about putting more money in your bank account.’

• ‘It's about postponing your consumption so that a greater share of income will not be consumed (which has an impact on China’s efforts to become a more consumption-led economy).’
• ‘And it about buying assets that hopefully will appreciate in values.’

‘Postponing consumption and investing adds additional demand for assets.’

• ‘One important class of assets for most households – and a necessary one for young men to be competitive in the marriage market - is housing.’
• ‘Therefore higher housing prices come in part from this demographic force.’

‘And all asset prices can be pushed up because of the gender imbalance - it's just harder to find evidence.’

• ‘The economic force of the effect of gender imbalances in the marriage market shows up more strongly and more clearly in housing prices.’
• ‘But the logic of the story applies to many other assets’ prices as well.’

‘So, the demographic idiosyncrasies of China’s marriage market accounts for higher asset values – especially housing prices over the past couple of decades -  lower consumption, and higher savings.’

• ‘All making Beijing’s efforts at reshaping and controlling the economy that much harder.’

6 | Why the Chinese Government Can’t Rein in Housing Prices

‘The Chinese government has tried very hard for quite a while to moderate housing price increases by sometimes trying to restrict supply, sometimes trying to restrict demand, sometimes doing a combination of both of them.’

• ‘And so far they have not been very successful.’

‘One popular explanation for rising housing prices in China in last few decades is urbanization.’

• ‘But demographics – specifically gender imbalance - is one of the powerful forces underlying the housing prices.’
• ‘The gender imbalance accounts, as I have said, for one-third of China’s housing price increases over the past couple of decades.’

‘But if this story I'm telling you now - that the demographics is one of the powerful forces underlying the housing prices, one not recognized by the government – is right, then it explains why so far all government efforts have failed.’

• ‘These efforts have not been designed to address this problem.’

‘For the Chinese government to successfully address housing price issue, it will have to have a more comprehensive package of the policies, including those that help to moderate gender ratio imbalance.’

• ‘Only in that way will it produce a more sustainable solution.’

7 | When Will It End?

‘How long will the housing price issue caused by gender imbalance last?’

• ‘The relaxation of family planning policies began in 2015.’
• ‘Those policies are intended to reverse the decline in birth rates, but they will also have an impact on reducing the gender imbalance.’

‘Since no Chinese parents know how to produce a 20-year-old at birth, this particular demographic force is going to last at least for another decade or more.’

• (‘This also means that even with the government’s relaxing its family planning policy, the working-age cohort effect will only show up two decades later.)’

‘When housing prices moderate, the government probably will not attribute that to reducing the gender imbalance.’

• ‘They will think that something they banned has worked.’

8 | Q: ‘Can China Reverse Its Declining Birthrate?’

Fund Manager 1: ‘China’s fertility rate is 1.7, and it's been plateauing and now for the last 23 years, remaining more or less constant.’

• ‘That doesn't look so dramatic to me. When I look at the birthrate per woman in many other countries, like Korea, Japan, most of the EU countries, it's much lower than that.’
• ‘So is Chinese birthrate so usually low or not?’

Shang-Jin Wei: ‘I think the answer is yes.’

• ‘A county’s birthrate is a function of both income level and other policies.
• ‘Generally speaking, as a country becomes richer, you see a decline birth rate.’

‘So when you benchmark the Chinese birthrate to other countries at a comparable income level, it does look very low.’

• ‘And if China ever approaches to French or Japanese income levels, you will have much, much lower birth, if you don't do anything else.’

‘The Chinese leadership now is extremely nervous about the birthrate.’

• ‘They have not only the three-child policy, there are also stories about various local governments trying to put in pressure party members to take the lead and produce more children.’
• ‘It’s ironic – first the government was heavy-handed on the side of getting birth rate down, and now it’s heavy-handed on the side of getting birth rate up.’

Fund Manager 1: ‘My subsequent question is this:’

• ‘Now you have the two child policy and the three child policy, but you could have the ten child policy – but it's about the willingness to have kids or for Chinese women.’
• ‘And do you expect any pick up just based on the fact that there is a policy that says have children?’

Shang-Jin Wei: ‘Should we expect to see a strong response or not?’

• ‘The data so far suggest that we don't see the very strong birthrate response the policy makers want.’

‘Globally, we know people don't want to have children.’

• ‘Raising children is so expensive.’
• ‘Plus the infant survival rate is so good.’
• ‘Therefore, the argument goes, we should not expect to see a rebound of the birth rate.’

‘I have somewhat different views. My guess is that Chinese response rate a few years down the road will be stronger than right now for the following reason:’

• ‘Decades of a family planning policy, the so-called “one-child policy,” have trained young Chinese and their parents to convince themselves that the optimum number of children is one, or at most two, if you are in wealthy places.’
• ‘Therefore, now you go and reverse the process, "Please go ahead to have three children." ’
• ‘If you already convinced yourself the optimum number of children is one or two, why would you want to go to three?’

‘But as the Chinese people get wealthier, travel around the world and see families with several kids, this could change – the next generation could want to have several children.’

• ‘Not everyone is going to want to have three children.’

‘But China’s birthrate converging toward the global norm is something that we should not rule out.’

• ‘Therefore, the medium-term response could be higher than what we're seeing today.’

Fund Manager 2: ‘As a person who was born and grew up in China – and who is the only child in my family - I agree with all that Shang-Jin has said.’

• ‘My friends in China - everybody - is talking about three child policy.’
• ‘I can really feel that while it's a big topic now, it's not something people can accept in the short term because people in China are so used to the one child policy or having two children.’

‘A lot of people feel like the ideal, the optimum number of children is a maximum two children.’

• ‘So it's not a surprise to me that the three child policy hasn’t had a high response in the short term.’
• ‘But I think in the long term it will be much better.’

9 | Other Implications

‘For housing in China, all this suggests you will want to examine more than just average housing price increases.’

• ‘You should also pay attention to the differential housing prices in different parts of the country caused by these demographic forces.’

‘More broadly, you should apply this analysis to other countries – like India and Vietnam - that that have more men than women.’

• ‘Although the gender imbalance problems in India and Vietnam are not as severe as China’s, you should find a similar set of impacts on the economy.’

‘I’ll stop here for your questions and comments.’