ALL PAIN, NO GAIN:

With China's working population declining by 0.5% to 0.6% a year over the next several years, productivity growth per worker must be higher than it has been over the past two decades to achieve the same amount of GDP growth.

This matters when we project China's long-term growth rates. Beijing announced last year that it expected to double China's real GDP in the next 15 years. This requires average real GDP growth of 4.7% a year. Yet a declining working population means that China's productivity per worker must increase at a faster rate: 5.2% to 5.3%, rather than the 4.5% it would have needed when the working population was still rising.

We can perhaps see these consequences more clearly by focusing on balance sheet implications. One advantage of a growing working population is that the amount of debt that must be supported by each worker automatically declines over time.

The opposite is true with a declining working population. Total debt in China represents at least 280% of China's GDP, according to government figures. If China's future GDP growth requires the same level of credit growth as it has in the past, then China's debt-to-GDP ratio must rise to somewhere between 400% and 500%: an unprecedented level of debt, especially for a developing country.

Adjusting for a declining working population makes the numbers even worse. As the working population declines by 0.5% to 0.6% a year, the amount of debt per worker rises by an additional 2% to 3% of GDP every year.

These are bad numbers, but they do not in themselves represent a crisis. This is because China's debt trajectory was already unsustainable, and the main impact of China's adverse demographics will be to accelerate the adjustment. That is why China's leadership must either resolve its overreliance on debt or--like most countries that have followed a similar growth model--be forced to do so in a way likely to be economically painful.

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