China must pursue reform as demographic dividend wanes, Yao says

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China must pursue reform to keep its economy "full of vigor" as the demographic advantages that helped boost the nation's growth wane, said Yao Jingyuan, the former chief economist at the statistics bureau.

"The demographic dividend is dwindling sharply," Yao said at a conference in Beijing today, referring to the economic benefits that arise from decades where an economy has a higher proportion of working-age citizens. "We are left only with the reform dividend," said Yao, who was chief economist at the National Bureau of Statistics for a decade until his retirement last year.

Yao's comments underscore calls by Vice Premier Li Keqiang, promoted last month to the No. 2 spot in the ruling Communist Party, that three decades of economic opening must be accelerated as the push to overhaul the economy encounters obstacles. Rising labor costs, environmental protection and yuan appreciation have curbed China's export competitiveness and investment-driven growth has led to overcapacity and a declining share of consumption in the nation's economy, Yao said.

"We haven't made substantial and fundamental progress" in transforming the country's growth pattern and raising domestic demand, a need that was highlighted as far back as the Asian financial crisis in 1997, said Yao, who is a councilor to the State Council, China's cabinet "We are now back in the same place where we've had a change in the external environment and a recession in developed countries. Our factories have had to slash production or shut down: we coughed when they got sick."

External imbalances

Investment growth has outpaced consumption for years, posing dangers including higher bad debts, overcapacity, lower profitability, environmental degradation, social instability and external imbalances, according to the World Bank and International Monetary Fund. The global financial crisis exposed the risks to China's economy from its dependence on exports, as shipments fell for 13 months and about 20 million migrant workers lost their jobs.

Consumption, which includes government and household spending, fell to 49.1 percent of gross domestic product in 2011 from 59.6 percent in 2002. Last year's figure was close to the lowest contribution since China's reform and opening policy started in 1978, government data show.

"Changing this model has become of paramount importance if China is to avoid a disruptive bust in investment in the next one to two years and lapse into a middle-income trap in the medium term," George Magnus, senior economic adviser at UBS AG, wrote in a Nov. 22 report, referring to growth slowdowns in developing nations after incomes rise.

"China's economic growth in the past 30 years was mainly driven by the demographic dividend and reform dividend," Yao said. China's era as an economy with low input costs is gone forever, he said.

"How to keep China's economy full of vigor in the future and how to increase the reform dividend are the most important tasks in the next stage. Every step forward is difficult."

Yao said China would have no problem achieving economic growth of more than 7.5 percent this year, and the government will achieve its target of keeping the inflation rate under 4 percent.

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