The working paper on demographics recently published by the People’s Bank of China is a pretty interesting document, and has gotten more than the usual amount of attention. It doesn’t read much like the cautious, dry and technical papers previously released by this august institution. There’s not much quantitative analysis or rigorous logical argument; it’s more like an extended op-ed, arguing vigorously that major demographic changes for China are coming and that the country needs to wake up to that fact and adapt quickly.

This call to arms is well-timed. It seems likely that the much-delayed figures for China’s 2020 population census will confirm what many demographers have been saying for a while: that China’s fertility rate has been overstated, and therefore that its demographic transition and the aging of its population are going to happen even faster than standard forecasts project. The authors (listed as Chen Hao, Xu Ruihui, Tang Tao, and Gao Hong) say that China’s government should lift all remaining policies that restrict births, and switch to strongly encouraging childbirth and reducing the financial burdens (like education) that discourage families from having more children. They even suggest that China could experiment with immigration–previously an almost taboo topic–to help replenish its shrinking and aging population.

But what is perhaps more interesting than all the things the authors think should change is what they think China should not change: an investment-focused growth model. They don’t actually hold out a lot of hope that pro-natalist policies will be able to turn the demographic tide; they acknowledge that the measures tried in the past by developed countries generally have not had dramatic effects (their point is more that China’s government government should at least stop actively discouraging childbirth). They argue that the only really successful adaptation to a shrinking and aging workforce has been to boost investment: substituting capital for increasingly scarce labor. The analysis of Japan is particularly interesting:

In response to declining labor and rising wages, developed countries have gradually replaced labor with capital, and in order to overcome diminishing marginal returns to capital, have conceived of using the abundant labor resources of developing countries to complement their excess capital. To this end, developed countries have used multinational corporations’ overseas expansion, deploying their output and capital exports to capture a higher return on capital. In fact, this strategy of developed countries has been extremely successful. Japan, for example, whose aging is severe, has created another Japan overseas during its supposedly lost two decades; the annual capital gains from overseas repatriation are about 3-4% of its GDP, and this money has become an important source of funding for its retirement.

An aging population poses a challenge to an investment-driven growth model, because it implies that the supply of household savings that can be mobilized for investment will shrink. This is pretty intuitive: as the population ages, a larger share of people become net consumers (retired people living off their savings) while a smaller share of people are net savers (working people at the peak of their earnings power). Therefore the average savings rate across households is lower. China’s data seem to support a strong role for demographics in both the rise of its household savings rate, and its decline since 2010 (see chart). As the population ages further, we should expect the savings rate to decline more.

For many economic observers outside China, the typical reaction to this prospect is something like relief: finally, China’s economy will normalize from its unbalanced, high-investment phase onto a trajectory more typical of other economies. This is decidedly not the reaction of the authors of this paper. They view the prospect of naturally lower savings rate with something like alarm. They do not see the transition to a lower share of investment and higher share of consumption as a normal process that unfolds as China becomes more developed, but something to be vigorously resisted. This section is worth quoting in full:

First of all, we should be highly vigilant and prevent the savings rate from declining too rapidly. We must be clear that our country not only bears the burden of development, but the burden of caring for the elderly. Understand this: without [capital] accumulation, there is no growth. Secondly, we must recognize that consumption is never a source of growth. We must understand that it is easy go from frugality from extravagance, but difficult to go from extravagance to frugality. The high consumption rate of developed economies has historical reasons; once you switch, there’s no going back, so we should not take them as an example to learn from. Thirdly, we should pay attention to investment. We must expand domestic investment in the central and western regions; although China’s marginal return on capital continues to decline, the potential for replacing workers with robots in the these regions is still promising. We must expand outward, and especially invest in Asia, Africa and Latin America, because these regions provide the only remaining large demographic dividend.

It’s remarkable how justifications for regional investment policies and the Belt and Road Initiative have worked their way into a paper on demographics. I don’t know if these prescriptions are wrong or right; certainly I cannot claim to have solved the problem of how to respond economically to an aging society. But I do find this paper a fascinating example of contemporary economic thinking in China, for the way in which it starts from different premises than we might expect, and comes to different conclusions. Many countries are already dealing with reality of an aging population, and as China starts to face up to the same problem, we should not assume that the solutions it reaches for will also be the same.