China's Demographic Challenge

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.