The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival

by Charles Goodhart

As China’s labour force dynamics change direction, the savings-investment balance within and even outside China will change as a result. Demographics will ensure that China’s extraordinary savings will fall. Prior to modern times, the (relatively few) old in China were cared for in the extended family.1 But the one-child policy, extended for too long, has meant that support has gotten more and more scarce for the aged. With an insufficient social safety net, personal savings rose to plan for retirement. Add to this the incentive on the managers of state-owned enterprises to retain, rather than pay out, profits, and the explanation of these extraordinary savings ratios becomes clearer. What will happen in the future? Although a higher proportion of the old work in Asia than in Europe or North America, increasing longevity will increase the dependency ratio, in China and elsewhere. The result will be a decline in the personal sector savings ratio and in China’s current account balance;