Demographic Shifts Create Unprecedented Challenges for US and Chinese Leaders

The USA and China were at pivotal points in their leadership in November 2012 but both governments also face major demographic challenges, which are set to become more acute in the coming decades. Presidential elections in the USA highlighted a clear division based on ethnicity, and the consumer profile will become more diverse. In China, new leaders face a demographic time bomb as its rapidly ageing population presents an increasingly urgent set of challenges. Such shifts in demography cannot be ignored and will shape government policy as well as labour and consumer markets in the world’s two largest economies.

A heterogeneous US society

The USA is known for being a nation of immigration and a melting pot of cultural diversity:

  • The country ranked the highest globally for the number of foreign-born (40 million in 2010) and is becoming increasingly diverse, driven by immigration and higher birth rates amongst the minority groups. The US Census revealed that newborn babies from minority groups became the majority for the first time in the year to July 2011. Analysts predict that the USA will be a “majority minority” country by mid-century;
  • The US elections revealed the importance of the Hispanic population once again. Euromonitor forecasts that the Hispanic/Latino population (the largest ethnic group) will grow to a share of 22.7% of the total population in 2030 compared to 16.4% in 2010.

Policymakers must recognise the country’s changing demographics with key challenges including immigration reform and addressing the illegal populace. Income inequality remains problematic as the USA is one of the most unequal developed economies. The average household annual disposable income of the richest 10% of households in 2011 was 36.5 times greater than the poorest 10% of households.

China’s ageing tsunami

China’s new leaders must tackle the challenge of being home to the world’s largest elderly population over the age of 65. This is partly because of the one-child policy since the
late 1970s (although it has loosened with many couples in rural areas and some in cities having two children) but also because of longevity and the fact that fertility rates would have followed the downward trend in other countries. The significance in China is that ageing is occurring much faster than in other developing economies, while the sex imbalance (more men than women) also poses problems for future fertility rates:

  • Euromonitor forecasts that the median age in China in 2030 will be 47.5, higher than the median age of a developed economy like the USA (39.5 in 2030);
  • This will have significant implications for the labour force, which we expect to decline from 2014 onwards. The working-age population will shrink by 2.2% in the decade to 2020 compared to an increase of 68.6% in the population aged 65+;
  • The government must address rising health and pension costs amid the problem of a shrinking labour force to place the burden of taxation on. Traditionally, the responsibility of caring for the elderly in China lies with the children but Chinese children are in a unique scenario: the “4:2:1” concept where a single child has the responsibility of two parents and four grandparents, which is unsustainable.

China’s business environment is already under pressure from rising labour costs and increasing competition from other manufacturing hubs such as Mexico. China’s new leaders must focus on creating a social safety net sufficient to deal with the mounting elderly burden, the lack of which is the primary reason for the country’s culture of savings. Failure to respond in time could result in widespread social instability adding to the risks for the country’s global competitiveness.