PopulationPopulationPopulationPopulation AgingAgingAgingAging ,Saving,Saving,Saving,Saving RateRateRateRate andandandand Long-termLong-termLong-termLong-term EconomicEconomicEconomicEconomic GrowthGrowthGrowthGrowth inininin

ChinaChinaChinaChina ：BasedBasedBasedBased onononon DynamicDynamicDynamicDynamic CGECGECGECGEModelModelModelModelLiu Yanjun1,2 Xiao Hao1,2 Zhu Shujin1,2

（1 School of Economics and Trade，Hunan University ,Changsha, Hunan

410079,China;2 China-Australian Economic Policy Research Center, Hunan

University ,Changsha, Hunan 410079,China）

Abstract:Abstract:Abstract:Abstract: Based on China's dynamic computable general equilibrium model(MCHUGE) with endogenous saving rate, the paper analyses and quantifies theimpact of population aging in the next four decades on China's macro-economicgrowth and structural adjustment from the perspective of consumption and investment.This paper firstly studies demographic effects on household saving rates by usingeconometrical anlysis. The paper also constructs a dynamic CGE model whichcontains endogenous saving rates and flexible closures according to differentsaving-investment decision theory. More importantly, the model characterizes theimpact of aging on economic growth by influencing saving ,capital formation andinvestment instead of choosing other channels, such as consumption mechanism andlabor supply mechanism in the previous researches.The simulation results shows that the negative effects of the aging of the population

which do not appear in the short-term due to the positive pull of the consumptionmainly come from the long-term pressure; funding gap caused by labor supply declineand the dropping saving rate in the long-term, are bound to reduce levels of potentialeconomic growth. Secondly, Economic structure has shifted passively towardsdemand-oriented and service-based economy, and the pulling effect of export andinvestment are supposed to face challenges. Meanwhile, financial reforms aresupposed to further deepen the impact of aging population on China's long-termeconomic growth along the future investment path.Keywords:Keywords:Keywords:Keywords: Population Aging; Saving Rate ; Long-term Economic Growth; Dynamic

Computable General Equilibrium Analysis

1.Introduction1.Introduction1.Introduction1.IntroductionAccording to the UN projections in 2010, the world population over 60 will

increase to 2 billion in 2050. Almost world-wide phenomenon of population aging isextensively and profoundly influencing the global economic and social life.Meanwhile, in China, the "China Aging Development "12th Five-Year Plan" issued bythe State Council indicates that the first growth peak will come in the period of "12thFive-Year Plan". And at that time, old man over 60 will grow from 178 million to 221million, with an average annual increase in the elderly 8.6 million and annual increasein the proportion of elderly population growth rate of 0.54%; besides, the size of thecountry's elderly population will double by 2030. China's population aging emerges in

the lower level of economic development and the imperfect social security system(Yang Xue, Hou Li, 2011), and further accelerates the trend of change at this stage inthe process of economic development, which will bring about a tremendous challengeto China's future economic development.The aging of the population causes the wide attention, largely because the

accelerating aging of the population affects the long-term economic growth in Chinafrom the economic and structure two aspects at the same time. As the economiceffects concerned, the total supply of labor or the labor participation rate drops. Onthe one hand it impacts on the labor inputs involved in the production directly; on theother hand, it upgrades the cost of labor and reduces the competitiveness of theirproducts, thereby affecting economic development. What’s worse, increased pensionburden will reduce residents and even national savings, and have a negative impact onphysical capital accumulation; too many resources to the inclination of the agingpopulation may also affect human capital accumulation and total factor productivitygains. All the above will bring negative impact on our long-term economic growth(Wang Wei, 2011). From structural effects, because of the direct effect of structuraladjustment of the labor and the indirect effects of the investment consumption, theaccelerated process of population aging will undoubtedly produce a deep-seatedimpact on the China's industrial structure.In developed countries in Europe, Japan and other countries, after varying degrees ofpopulation aging phenomenon, long-term growth potential has declined. Differentfrom Britain, France and other European countries as the representative of theWestern European model, China is much closer to Japan in the model of aging.Compared with developed countries in Europe and the United States, agingpopulation of Japan has the following features: fast aging speed, the obvious trend ofaging population and imbalance in regions, between rural and urban (Wang Wei,2007). After comparison, Japan stepped into the ranks of the elderly countries in1970, while China entered in 2000. But in 2035, China will have the same proportionof elderly population as Japan in 2010, and in the next two decades, China's agingspeed will be much faster than Japan's in the past two decades. Besides, the imbalancein aging process in regions in China is also widespread: in Chongqing in 2010 theproportion of the elderly population has been as high as 11.56%, less high in Jiangsu10.89% and Shanghai 10.12%, while the proportion of the elderly population in Tibetis still only 5.09%, having not yet entered the stage of the elderly population. SinceChina has similar characteristics and processes of the aging of the population to Japanand has also gone through a stage of rapid growth and the structural adjustment period,we should be fully learn from Japan's experience in economic growth to cope with theaging population.Comparing the before and after two periods of Japan's aging process accelerated,

90’s Japan's economic growth rate of year average was 0.96%, significantly lowerthan 4.65% in 1980-1990, and the economy remains in the doldrums. In factormarkets, the working-age population in recent years decreased from 86.38 million to81.665 million, and the labor supply continued to decrease; and on the funds supplyside, high savings as the strong support of the Japanese economy was also from up to

down since 1990, and in the next twenty years decreased by 7.8 percentage points.From the point of view of aggregate demand in the 1990s, Japan's economic growthmainly relied on the public investment and exported, and consumption grew weakly.The above situation improved since 2000, and after that the market demand becamethe dominant driving the growth of the Japanese economy, the Japanese economy hasentered a spontaneous growth phase (Zhao Jinping, 2007), and then the structure ofexpenditures changed. In the Industrial level, the primary industry significantlydeclined in GDP ratio and the absolute amount. The secondary industry, especially themanufacturing, recessed obviously. Only the third industry has maintained a goodmomentum of development, accounted for more than 70% in the national economyaround 2000. The aging of the population also caused varying degrees of impact onJapan's social welfare, corporate employment system (Hamid Faruqee, 2003; theHorioka Suzuki, 2007; Wang Wei, 2003; Meng double See Wu Haitao, 2005; HouJianming, Zhou Yinghua, 2010). Such an economic growth case alerted us that weshould face up to the accelerating aging process in China.

Table 1 Economic growth, savings rates and demographic changes in China and Japan

China Japan

The proportion

of the elderly

population

GDP

growth

Savings

rate

The proportion

of the elderly

population

GDP

growth

Savings

rate

1980-1985 5.68 10.78 35.67 10.20 4.28 30.70

1985-1990 5.94 7.92 37.06 11.95 5.01 33.02

1990-1995 6.39 12.28 41.18 14.39 1.42 32.18

1995-2000 7.01 8.62 39.66 17.18 0.85 28.99

2000-2005 7.58 9.76 43.33 19.85 1.20 25.89

2005-2010 8.19 11.22 52.45 22.69 0.35 25.23

Source: Economic growth and savings rate data from the database of theWorld Bank, the proportion of the elderly

population data computed from the UN projections (2010)

Table 2: The proportion of the elderly population changes in China and Japan (2015-2040)

2015 2020 2025 2030 2035 2040

China 10.94 13.63 15.84 18.75 23.27 26.79

Japan 31.62 34.41 36.12 38.13 39.76 41.69

Source：UN Projections (2010)

Japan's economic recovery and growth depended on a relatively high domesticsavings rate and investment rate (Stiglitz, 1996; Singh, 1998; Chen Hongbo, 2005),whose pattern of growth and the process of economic development in recent years hasa lot in common with Chinese. Changes in the age structure of the population of thepast 20 years had strong impact on the private saving rate in Japan, at the same timemade the investment proportion drop to below 30% in the 1990s, and the growth of

the Japanese economy experienced a "Lost Twenty Years". In view of this, from thepoint of departure of the savings rate, focusing on the long-term perspective, thearticle simulate the possible impact of an aging population in the next 40 yearsChina's macroeconomic in the context of the grasp of financial reform. The articleseeks different from the previous literature in three aspects. First, in choosingpopulation aging affect economic growth channels, we choose to saving way, andsimulate and analysis within born in the CGE model for the first time. Secondly, infact the mechanism setting, different from the previous study conducted only from theaspect of consuming, we consider two mechanisms, only consumption effect and bothconsumption and investment effect at the same time. And we also take the cast of thelong-term storage equality into consideration, in order to deeply characterize theimpact of an aging population from a long-term perspective. Thirdly, not only in themacro-level we analyze the situation of China's economic operation, but also in themicro-level of the structure of the industry and related industries we provide thecorresponding analysis and policy recommendations in response to the aging of thepopulation.2222 FindingsFindingsFindingsFindings inininin existingexistingexistingexisting literatureliteratureliteratureliterature aboutaboutaboutabout thethethethe impactimpactimpactimpact ofofofof populationpopulationpopulationpopulation agingagingagingaging onononon

macro-economicmacro-economicmacro-economicmacro-economic growthgrowthgrowthgrowth2.12.12.12.1 InfluenceInfluenceInfluenceInfluence channelschannelschannelschannels ofofofof thethethethe impactimpactimpactimpact ofofofof populationpopulationpopulationpopulation agingagingagingaging onononon macro-economicmacro-economicmacro-economicmacro-economic

growthgrowthgrowthgrowthIn previous studies, the direct or indirect impact of aging on economic growth

through the three main channels: labor supply, consumption and savings rate. Fromthe point of view of the supply of labor, on the one hand, the aging of the populationmeans that the population will be accounted for a greater proportion of those who donot work. If there is no corresponding compensation mechanism, population engagedin productive labor decline, the decline in output, and then bring negative impact theeconomy growth (Banister and Bloom, 2010). On the other hand, due to that thedivision of labor can bring economies of scale, the decline in the number of laborsupply will diminish the effect of division of labor, and the total output and per capitaincome also decreased (Wen Wang, Cai Fang, 2004). The second channel is theconsumer path, and aging population influence the economic growth by causing theconsumption scale and consumption field changes. According to the life cycle theory,the individual will smooth different periodic consumption in accordance with theexpected total income of his life, in order to achieve maximum effectiveness. Thismeans that children and old age consumption is higher than the incomeones(Modigliani and Cao, 2004). Wang Jinying, Fu Xiubin (2006), introducing theage structure of the population into the consumption function, analyzed the impact ofpopulation aging on consumer demand, from a quantitative point of view. Theresearch of Guest (2007) further extended the consumption impact caused bypopulation aging from the total level changes to consumption structure. The thirdchannel is the savings rate path. Judging from the impact of population aging onsavings, savings as a consumer dual entry, rising consumption will inevitably bringabout a decline in the savings rate. On the other hand, according to the theory ofrational expectations, an aging population will not only bring changes in population

structure, but also be accompanied by the increase in life expectancy. Taking China'snational conditions into account, in the context that the pension system is still notperfect, precautionary savings will increase in response to longer life after retirement(Wang Wei, 2009). But in the long run, with the gradual improvement of the socialsecurity system, the limited increase in precautionary saving, population aging willcontinue to reduce the total savings, which has been confirmed by the case of growthin Japan. At the same time, since the savings work as the supply side of capital, theimpact of population aging on savings will directly reduce the scale of investment, thegrowth rate of physical capital, or the effective interest rate through changing in thesupply of funds, and then have an impact on investment, economic growth (Massonand Tryon, 1990; Yashiro, 1997; Peterson, 1999).

Other approaches, through which the aging of the population influence theeconomic growth, also include social security point of view, human capital formationand technological progress. Banister and Bloom (2010) proposed that due to thegreater needs of the elderly Medicare funding, it will also reduce that should be usedfor other financial support to stimulate economic development. Fougere and Merette(1999) proposed the aging of the population to increase investment in humancapital formation created opportunities for the future generation by building acomputable OLG model for seven industrialized countries, which can stimulateeconomic growth and reduce the potential negative impact of aging on per capitaoutput; they also hold the idea that since the returns to human capital will rise, therewill be a redistribution from physical capital to human capital investment, and thendespite optimal savings will decline, the actual output will not be a permanent decline.The opposite point of view is that the aging of the population decline the ability oftechnological innovation, and thus trigger trade protectionism to protect the domesticmarket, then weaken the contribution of technological progress and flexible labormarket for long-term growth, and bring a negative impact (Wang Dewen, CaiFang,2004).Previous articles have more discussion on the effects of aging on economic growth,

through labor supply and consumption path analysis but pay less attention to thesavings rate channels. Recalling the course of recent years’ rapid economic growth inChina, the most typical feature is the continued high rate of investment and highsavings rate, but behind this long-term co-existence of the phenomenon, it is closelyrelated to the "demographic dividend" (Li Yang and Yin Jianfeng, 2007). With thedemographic dividend period about to shift to the population balance, the impact ofchanging population structure on the savings rate, and thus on the investment,economic growth should not be underestimated. The article just follows this line ofthought, that is from the point of departure of the savings rate analysis of populationaging on the impact of China's economic growth and structure.2.22.22.22.2AnAnAnAn overviewoverviewoverviewoverview ofofofof relativerelativerelativerelative empiricalempiricalempiricalempirical researchresearchresearchresearchIn the quantitative analysis of the impact of population aging on economic growth,

which have been emerged, measurement tools provide a good analysis method(Hongbin Li and Jie Zhang, 2007; Wen Wang, Cai Fang, 2004). The project onpopulation aging impact on the economic future of the operation is still concentrated

in the qualitative analysis, or based on quantitative analysis of historical dataeconometric model. However, quantitative studies of the overall macroeconomicsystem are few. Compared with quantitative analysis, the CGE model, considering theinteraction among the economic variables, system characterize the impact on themacroeconomic by population aging, from a general equilibrium perspective. PengXiujian (2006) built the Chinese computable general equilibrium model (PRCGEM),through influence economic growth channel that labor supply decrease lead to lowergrowth in physical capital, got that in 2010-2020 China's GDP growth rate would fall2.4 percentage points based on the 2000-2010, and this index would decline by 4.8%during 2040-2050. And he also put forward conclusions. that the decline in investmentdemand brought about by the aging will be more than the savings rate of decline(article assumes exogenously given), and therefore the declining savings rate can meetthe domestic demand for investment. Fougere and Mercenier (2007) based on theimpact mechanism of population aging on labor supply, taking into account changesin consumer preferences caused by the composition of the population change, madequantitative analysis of the impact the aging of the population on various industries,using dynamic CGE model. They proposed that although the aging of the populationwill make real per capita GDP in 2050 relative to 2000 decreased by 11%, someindustries in the process of aging of the population will gain profit due to changes inconsumer demand. For example, the medical industry share of GDP rose from 4.8% in2000 to 7% in 2050, and finance, insurance, real estate industry will benefit from it atthe same time. Kim and Hewings (2011) also got the conclusion that the aging of thepopulation has a negative impact on the domestic total economy through the affectingthe labor supply channels and constructing a Korean cross-regional CGE model, butfor the local economy, a sharp reduction of the labor force of Seoul City Group canreduce the inter-regional inequality. All the above are researches on that aging of thepopulation affect the labor supply and then transfer to the different levels of economicgrowth, while savings rates are assumed to be exogenous given in these articles, andthat the aging of the population affect the savings rate to the role of economic growthin the mechanism is not good to be analyzed and discussed. Xiao Mingzhi (2012)using MCHUGE model, introduced the life cycle theory in the consumption function,discussed the economic impact may caused by China's aging population throughconsumer channels. Although they introduced precautionary savings to characterizethe consumption function, it cannot be endogenous savings rate in the model system,play its due role.In the past, due to the various constraints of the country's financial market, low

savings-investment conversion rate make that the aging of the population affectsavings rate path is considered less. With the gradual improvement of China'sfinancial markets, interest rates go towards market-oriented and the enhancement ofthe conversion efficiency of savings, and affect interest rates, the rate of return oninvestment by capital supply and demand and thus affect business investment, thenthis mechanism will play an increasingly important role. The article is just from thischannel. We make savings rate endogenous in the CGE model investment module forthe first time. Through the choice of different type of closing conditions, we introduce

the savings rate - investment mechanism, while we assume savings and investment areequal in the long-term and set the corresponding model scene. In the generalequilibrium perspective, we analyze the impact of population aging on futuremacroeconomic China from the economic effects and structure effects two levels.3. Measurement research on impact of aging population on the household savings rateFirst of all, we quantitatively analyze the impact of an aging population and otherdeterminants of household savings rate by means of measurement tools, to get theelasticity coefficients of endogenous savings rate equation of the CGE analog portion.In the existing literature, articles that use the national savings rate of time-series datato make econometric analysis get the result whose explanation of limitedeffectiveness, for the sake of limit sample. Kuijs (2005) put forward that China'shousehold savings and investment difference primarily as the net financial investment,become the main source of investment funds. But based on the existing 2008 Flow ofFunds (Physical Transaction), 61.8% of the savings of the household sector makefunding to other departments. Taking that China's pension system is not perfect intoaccount, the increase in the pension burden caused by the aging of the populationmainly borne by households. Accordingly, the articles select household savings rate asproxy indicators of the savings rate. We take the metric method that Horioka and Wan(2007) used household survey data to measure household savings rate, while ensuringdata availability and sample size. The household savings rate is defined as the ratio ofhousehold savings and income disposed by residents, which household savings is thedifference between disposable income and consumer, so that we can get panel data ofChina's 31 provinces and municipalities.3333 DemographicDemographicDemographicDemographic effectseffectseffectseffects onononon householdhouseholdhouseholdhousehold savingsavingsavingsaving ratesratesratesrates :An:An:An:An econometricaleconometricaleconometricaleconometrical anlysisanlysisanlysisanlysis3.13.13.13.1 DeterminantsDeterminantsDeterminantsDeterminants ofofofof householdhouseholdhouseholdhousehold savingssavingssavingssavings raterateraterateFrom the point of view of aging population, according to the life cycle hypothesis,

Modigliani (2004) put forward that direct impact on the savings rate is populationstructure, rather than population growth. Kuijs (2006) found that the elderlydependency ratio and the child dependency ratio have a negative impact householdsavings rate in the econometric analysis, and the former has a greater effect. In thelong run, the elderly dependency ratio increase by 1 percentage point, which willbring the decline of the savings rate of 0.5 to 1.6 percentage points. On the other hand,Bloom (2007) considered the retirement decision-making and saving decisions areendogenously determined by the life expectancy, and then introduced a new channelin the impact of aging on the savings rate, that is to say that consider the aging of thepopulation lead to extend the life expectancy, thereby increase the household savingsrate. Li (2007) used the multinational panel data from 1960 to 2004 to confirmconclusions that the savings rate and life expectancy is relevant, and that the increasein life expectancy of the individual propensity to save is also tend to rise, differentfrom Bloom (2003).Other household savings rate effect factors include: the level of real income (Kraay,

2000), financial sector development (Wang et al. 'S, 2011; Horioka, 2012), inflationand interest rates (Modigliani and Cao, 2004; Horioka and Wan, 2007; Task Force ofthe People's Bank of China, 1999; He Xinhua, Cao Yongfu, 2005; Wen-Xing Li, Xu

Changsheng, 2008, etc.).3.23.23.23.2 EstimationEstimationEstimationEstimation modelmodelmodelmodelAccording to Loayza et al (2000), combined with model selection of Horioka and

Wan (2007) and Levin Star (2008), we choose a simple econometric model, whichdoes not depend on a particular theory, while not dependent on a specificenvironment.Considering the development of China's financial market is not perfect, a measure

of the degree of development of the financial market indicators fails to agree, and wecannot get the provincial urban data considered in the regression. The impact of theinflation rate is reflected by the introduction of the effective interest rate. Selectedexplanatory variables are as follows:LNGDP = GDP per capita logarithmic; where urban residents income is disposableincome, rural residents is net income, and estimated coefficient is positive;YOU = Children's population dependency ratio, that is the ratio of population under14 years old and the total number of people aged 15-64; estimated coefficient isnegative;AGE = elderly population dependency ratio, that is the ratio of population over 65years old and the total number of people aged 15-64; estimated coefficient is negative;PRE = life expectancy; estimated coefficient is positive;RATE = the effective interest rate, that is differences between the nominal interestrate and the inflation rate; measuring the impact of the financial variables is animportant factor to affect consumers' intertemporal choice; the estimated coefficient ispositive;The desired estimating model is as follows:

tttititit ratepreageyouGDPSR εββββββ ++++++= 543210it ln

3.33.33.33.3 DataDataDataData selectionselectionselectionselectionIn order to get data of different type in the country's 31 provinces, we select the

sample period 1998-2010. The relevant data in computing the household savings rate,and data in computing children's population dependency ratio, and the elderlydependency ratio are all from the 1999-2011 China Statistical Yearbook. The lack ofurban residents' disposable income data and urban residents consumption data of theTibet Autonomous Region in 1998 are completed by the growth rate method. Due tothat we can only gain the life expectancy of the sub-region data in 2000 in the ChinaStatistical Yearbook, we take use of the national average life expectancy data in theWorld Bank WDI database. GDP per capita data come from "China StatisticalYearbook" and are dealt with the GDP deflator of each year, then gain the real GDPper capita based on 2000. The effective interest rate of the nominal interest rate iscalculated by weighted average of one-year deposit interest rate of each year, and datain calculating rate of inflation of the effective interest rate are taken from the WorldBank WDI database.

Table 3 variable definitions and statistics

Variable definitions Unit Avera Standard Minimum Maximum

ge deviation

SR Household savings rate % 24.22 4.98 11.44 36.17

LNGDP Logarithm of per

capita income

8.97 0.51 7.87 10.33

YOUNG Children's population

dependency ratio

% 28.64 8.78 9.64 57.78

AGE Elderly dependency

ratio

% 11.56 2.57 6.13 21.88

PRE Life expectancy Year 72.02 0.74 70.93 73.27

RATE Effective interest rate % 1.01 2.20 -3.65 4.58

3.43.43.43.4 EstimationEstimationEstimationEstimation resultsresultsresultsresults andandandand potentialpotentialpotentialpotential explanationsexplanationsexplanationsexplanationsThe results in the first and second columns of Table 2 are estimated by using

regression of fixed and random effects model. Fixed and random effects model theestimated coefficients difference is small, and p-value Hausman test is 0.34, therefore,we select a random effects model to analyze the results.

Table 4 The inspection influencing factors of China's household savings rate

variab

lesage you rate pre lngdp Intercept

Coeffi

-cient -0.00352 0.00189 -0.00062 0.0316 0.0401 -2.402

t

value (-3.22936)*** (3.80282)*** (-0.86657) (8.97727)*** (3.42735)*** (-9.16794)***

Note: *** significant at the 1% level.

The results show that the elderly dependency ratio (k) and life expectancycoefficients are significant, and they are in line with expectations judgment. It can beseen from the coefficients, both are powerful in explaining the household savings rate.Ageing will have a significant impact on China's savings rate. The logarithm of theper capita income coefficient is significantly positive, which is in line withexpectations, and the semi-elasticity coefficient is the biggest, so it’s a major factor ofChina's household savings rate changes. At the same time you can see, the childdependency ratio coefficient is significantly positive. Taking into account our currentsituation that minor are given less social welfare, and education and health care costsare mostly borne by the family, besides the minor population burden rate willsignificantly reduce the consumption needs of the residents (Fang Fuqian, 2009), thisresult is acceptable. The coefficient of the effective interest rate is not significant, onthe one hand, it’s because that the rise in interest rates itself has impact on savings intwo aspects, substitution effect make savings increase and the income make the

savings decline (Elmendorf, 1996; Wang Wei, 2008); on the other hand, China hasbeen in a state that interest rates was under control in the past, then non-equilibriuminterest rates brought about by the non-equilibrium market failed to give full play toits role in the regulation of the supply and demand of funds, so that the relationshipbetween the interest rate and the savings rate is not significant. But it can be expectedthat with the accelerating process of China's marketization of interest rates, the impactof interest rates on savings rate will gradually appear.4444 CGECGECGECGE modelingmodelingmodelingmodeling andandandand simulationsimulationsimulationsimulation resultsresultsresultsresultsThis article is based on a general equilibrium perspective, we use MCHUGE

models jointly developed by Hunan University and Australia Monash University,(Lian Mingyong, Zhu Shujin 2008), and appropriately expand to simulate themacroeconomic impact of population aging on economic growth in China. MCHUGEmodel is built on the Walrasian general equilibrium theory and input-output theory,including land, capital, and labor three major production elements, as well asproduction, investment, consumption, exports, government spending, inventories andother six actors. And it can select flexible closing conditions (select differentexogenous variables) to achieve the dynamic simulation process.4.1 Description of the macro model and main equations contained of aging, the savingrates, and economic growth

MXGICY −+++= （1）

TLKAFY += ),( （2）

1-1- ttt IKK += （3）

NP*GsS = （4）

)(rII = （5）

)(*)( rSarI = (5’)

SI = （5’’）

),,,,_(s rpreyouagegdpperf= （6）(1) is the determine equation of the GDP by expenditure approach; (2) is thedetermine equation of GDP element method; (3) is the equation of the capital stockformation; (4) is the equation of savings; (5) is the equation for the investmentdecisions; (5 ') links funds between savings toinvestment through interest rate; (5'') isthe saving-investment identity, which reflects the long-term savings-investor relations;(6) determined equation for the savings rate.Standard macroeconomic models only introduced in equation (1), (2), (3), (4), (5),

that is gaining the growth of the capital stock by investing in and thus bring economicgrowth. This macro model has problems in two aspects: one is that savings rate isexogenous given, ignoring the savings rate within the biochemical problems;the otherone is that it fragment relationship between funding supply and demand, ignoring therelationship between savings and investment.In CGE model, closed choice of reflecting the different macroeconomic theory has

a significant impact on policy simulation, but the most important aspects todistinguish between different closure rule is how to maintain balanced mechanism of

selection (Mark Thissen, 1998). According to that, on the basis of standardmacroeconomic models, this article makes appropriate improvements to increase thesavings rate endogenous closure and long-term closure. In the savings rateendogenous closure, following the closure rules of the loan capital, assuming thesavings are the supply of loan capital, savings rate is then endogenous in the model byequation (6), and jointing (4) to include savings; Investment is the demand for loancapital, andreplace the previous investment decision equation by (5 '), and endogenousinterest rates make savings and investment clearing (Taylor, 1991). In the equations, arepresents the savings - Investment conversion rate, reflecting the impact of thefinancial market. The savings rate indirectly affects effective interest rate, then causeschanges in the rate of return on investment, and changes the scale of investment. Onthe one hand, it directly impact on constitution of expenditure GDP; on the other hand,it influences elements GDP to affect macroeconomic aggregates through theaccumulation of capital stock (equation (3)). The long-term closure replace theinvestment decision by equation (5''), and take neoclassical closure conditions drivenby savings, besides it thinks that in order to ensure the full employment level of theeconomy, there will always be a mechanism making investment equal to savings. Thatis to say that the investment endogenously determined by savings. Besides thismechanism assume that interest rates is at work (Swan, 1970; Mark Thissen, 1998;the Yan Binjian, Fan Jin, 2009). (5'')’s construction makes that it can observe possibleimpact on economic growth by the aging of the population in the long-term.In parameter design, based on the parameter coefficients of the savings rate

decision equation, it gain the other factors except for the interest rate elasticity of thesavings rate from the measurement results before. Since the coefficient in themeasurement analysis is not significant, we select a value of 0.05 refer to study. OfHorioka and Wan (2007), Wang Wei (2008). In addition, the model also introduces theintertemporal link equation of capital accumulation and labor market dynamicadjustment equation in dynamic depiction,. In the model, capital growth is determinedby the rate of return on investment, return investment rate depends on the next rent ofcapital, expected capital formation of the next issue of price and current capitalformation, prices and interest rates (Dixon and Rimmer, 2002;Lian Mingyong, ZhuShujin, 2008). Except for the formula(4), it contains further equation:

[ ] [ ] [ ]ptrtC

tCED

ptrtCtQE

tROREj

jtj

j

jtjt _1

1*)(

)1(*)-1(

_11*

)()1(

1-)(+

++

+

++= （8）

[ ] ⎟⎟⎠

⎞⎜⎜⎝

⎛ += 1-

)()1(

)(tKtK

ftROREj

jjtjt （9）

In the equations, j represents the industry; K is capital, EROR is the expected

ROI, D is the capital depreciation rate, Q is the capital rental rate ptr_ is the

after-tax real interest rate, and C is to increase the cost of a unit of capital required. (8)is the static expected return on investment decision equation, and (9) is capital

appreciation decision equation, that is to say capital growth is decided by the rate ofreturn on investment. In the handling of labor market dynamics, the model assumesthat labor market supply and demand imbalance caused by exogenous shocks willgradually align, by setting labor lagged coefficients, and slowly adjust the impact onthe labor market imbalances through a step-by-step change in wages to. (Dixon andRimmer, 2002). The equations include

)(*1-)1-()1-(1-

)()( tFEM

tLTOTtLTOT

tLTOTtLTOT

ff

+⎥⎥⎦

⎤

⎢⎢⎣

⎡= （10）

)(_1-)()(1-

)1-(W)1-W(1-

)(W)W( tWF

tLTOTtLTOT

tt

tt

fff

+⎪⎭

⎪⎬⎫

⎪⎩

⎪⎨⎧

+⎪⎭

⎪⎬⎫

⎪⎩

⎪⎨⎧

=⎪⎭

⎪⎬⎫

⎪⎩

⎪⎨⎧

α （11）

Where W is the real wage rate, LTOT is the level of employment. The subscript

f represents the wages determined supply and demand or labor employment

expectations of labor market to without policy impact. F is a function of policy shocks,given the value of a function of the year in which the imbalance happens, and insubsequent years the value of zero. EM and α are employment adjustment and wageadjustment parameters respectively. (10), (11) reflect the dynamic adjustment ofemployment and wages respectively.4.24.24.24.2 ForecastForecastForecastForecast baselinebaselinebaselinebaselineSince database of the MCHUGE is based on 2002 input-output table in China, we

firstly update the database to 2011 through historical simulation, and estimate thecoefficient; and then use the model to make prediction simulation, running from 2012to 2015, and subsequently make simulation analysis until 2050 by taking five years asa base period.Design forecast baseline, and set growth and structural changes of the country's

macroeconomic in order to obtain the development path of China's economy in thenext 50 years without considering the impact of an aging population. Review theliterature, then we can see that Qiu Xiaohua, Zheng Jingping (2006) buildt China'seconomic growth model with a combination of factors, and forecast to GDP growth in2020 and the proportion of industrial added value will decrease from 9.1% 15.2% in2004, to 7%, 9.6% in 2020, from the angle of the dynamic analysis of China'seconomic growth. .National Development and Reform Commission Academy ofMacroeconomic Research Task Force (2008) constructs the GDP production functionmodel, and its prediction results show that the smooth operation of the economy as awhole. Besides, effective GDP growth between 2010 and 2030 go down 3.3percentage points to 6.5%; three industries’ growth rates have declined, but theproportion of tertiary industry rose to 47.9% in 2030 with an increase of 7.4%.Prediction results of 2008-2030 economic operation of the baseline scenario, gainedby Li Shantong (2011) using DRC-CGE model, show that "Twelve Five" period ofGDP rapid growth was 7.9%, and the years 2021-2030 will transition to about 6.2%;On GDP structure, share of GDP took by the household consumption rose steadily to49.8%, international trade tend balanced, but investment accounting declined by

11.7%; on industrial structure, the proportion of primary and secondary industrydeclined, while the proportion of tertiary industry rise from 40.8% in 2010 to 50.9%in 2030. Wang Xiaolu (2009) has made the corresponding prediction of China's futureeconomic growth by growth accounting decomposition factors of production indifferent periods’ contribution to growth. Overall, China's economic growth in thecoming decades will gradually slow down to a steady level; consumption will increasein the proportion, and investment will fall; structure of three industrial will be morereasonable, and the proportion of tertiary industry will increase significantly.Combining the above research results and UN projections (2010) population-relateddata, the forecast baseline selected settings are shown in table.

Table 5 the annual average of predicted baseline data

2011-2020 2021-2030 2031-2040 2041-2050

Actual export 8.0 6.2 4.5 3.2

Actual imports 7.8 5.9 4.1 3.5

Actual investment 8.2 6.5 4.2 3.3

Actual government

consumption6.7 5.9 4.2 2.8

Actual consumer

consumption7.1 6.0 4.7 3.5

The growth rate of

primary industry4.2 3.9 3.6 3.2

The growth rate of

secondary industry7.6 6.1 4.7 3.6

The tertiary industry

growth rate8.8 7.3 5.6 3.9

Labor growth rate 0.5 0.0 -0.2 -0.1

the total population 0.7 0.7 -0.5 -0.9Note: The the forecast baseline set is 10 years time to change, but to be consistent with the

policy simulation, still five years as a shock.4.34.34.34.3 DescriptionDescriptionDescriptionDescription ofofofof savingsavingsavingsaving closuresclosuresclosuresclosures andandandand policypolicypolicypolicy simulationsimulationsimulationsimulation settingssettingssettingssettingsCGE simulation analysis takes dynamic analysis thinking, and makes further policy

simulation on the basis of forecast simulation, then reflect the impact of specificpolicies on the economy's long-term effects by the comparison between the two. Anaging population brings about changes in the elderly dependency ratio. Based on thepredict data of UN projections (2010), we can find that in the coming decades, China'selderly dependency ratio will continue to a big increase.

0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2010 2015 2020 2025 2030 2035 2040 2045 2050

%

0

2

4

6

8

10

12

100

million old dependency ratio

labor force

Figure 1: changes trend of China's elderly dependency ratio and labor force predicted by United Nations

Data source: UN projections (2010)

Let’s view from three phases, it steadily grow between 2010 and 2030, the annualgrowth rate remains 16%. Subsequently elderly dependency ratio accelerate growthtrend and maintain until 2040, and at this stage elderly dependency ratio jump to36.9% in 2040 from 23.9% in 2030, with a significant increase. Reducer of elderlydependency ratio slows down again in 2040, with an rise of only 5% in 10 years,indicating that the elderly dependency ratio grow and then the process of aging of thepopulation has been tended to be stabilized. According to this data, in the policysimulation section, we will shock the movement of the elderly dependency ratio everyfive years during the period 2010-2050, and the impact value is calculated inaccordance with the United Nations forecast data. At the same time, taking intoaccount the aging will cause some negative impact on the labor supply, according toUnited Nations estimates data we calculate changes in labor supply in the years2012-2051, and impart according impact value.According to the model, the policy simulation of the article will discuss in two

cases, and explain the comparison generated by different macro results. Sim0,considering the impact population aging put on the macroeconomic under thetraditional mechanism, we incorporate equation (6) into the original model (includingequation (1), (2), (3) and (5)), affect the savings rate and change the ratio of savingsand consumption by the impact of the old age dependency ratio, through the marginalpropensity to consume passing through to consumers module and thus effect theoverall macroeconomic. What this simulation considers is the aging of the population- savings - consumption - economic growth channels. Sim1, endogenous savings startto work. Based on Sim0, we introduce equation (4), (5 ') in savings and investmentmodule, and provide a new way for the savings rate affect economic growth. The firstsimulation still cannot explain China's economic potential economic and structuraleffects caused by population aging from the long-term perspective. With the help ofthe replacement of equation (5 '),we can fully observe the impact on future economic,based on the assumptions that the neoclassical closure forced investment and savings

are equal with the consideration of financial market reform process accompanied bythe aging of the population.

Table 6 Policy simulation mechanism design

Channels of influence

Sim0 Traditional mechanisms, influence channels of labor and consumer ;The savings

rate is affected by the elderly dependency ratio, but it does not affect the actual

interest rate

Sim1 The working mechanism of long-term savings, by the adjusting interest rate,

investment savings are made equal4.44.44.44.4 SimulationSimulationSimulationSimulation resultsresultsresultsresults andandandand analysisanalysisanalysisanalysis4.4.14.4.14.4.14.4.1 PPPPopulationopulationopulationopulation agingagingagingaging resultsresultsresultsresults analysisanalysisanalysisanalysis ofofofof traditionaltraditionaltraditionaltraditional mechanismsmechanismsmechanismsmechanisms(1)(1)(1)(1) TheTheTheThe savingssavingssavingssavings raterateraterateAccording to the setting of equations in the savings rate, elderly dependency ratio

increases will lead to a decline in the savings rate, whose downward trend remains thesame as the upward trend of the elderly dependency ratio. The degree of rising old agedependency ratio in 2040 slow down, and corresponding degree of decline in thesavings rate tend to easing. Ultimately it decreases by 24 percentage points in 2050compared to the base period, decreasing from 29% in 2012 to 22% in 2050, which isconsistent with Kuijs’ (2006) predictions of the savings rate. The continuing to declinesavings rate put impact on the overall macroeconomic through the marginalpropensity to consume and the impact of interest rates on China's consumption andinvestment.(2)The(2)The(2)The(2)The effecteffecteffecteffect onononon growthgrowthgrowthgrowthA decline of the saving rates affects the overall macro-economic by increasing the

marginal consumption propensity and directly contributes to the increase in thedomestic price index. As the factor market concerned, in the short term, the increasein nominal wages will be less than the average price movements of factor. It leads toemployment levels rose slightly compared to the base period; but in the long run,nominal wages always maintain growing and the rate of growth of nominal wageswill exceed the speed of average factor price increase in the 2031-2035.Due to thehysteresis adjustment of the labor market, employment in the next 2036-2040 yearswill drop into the negative growth, and ultimately drop to a decrease of 7.67%compared from baseline. Better macroeconomic situation contributes to the increaseof expected expected rate of return on capital compared with baseline, andmeanwhile ,the capital stock will increase slightly (0.69%). Income approach GDPaffected by combined effect of the labor supply, the capital stock and total factorproductivity change, accompanied by employment decrease in the 2036-2040 years tobelow the baseline , the negative impact of aging is gradually revealed.GDP by expenditure, in the short-term ,gross domestic product (GDP) affected by

positive impact driven by consumer demand, GDP increased; then,the subsequentlabor impact channels has begun to show ,with the turning point appearing in 2040which is below the baseline level and pull down the average GDP growth rate by 1%

in 2050. Including, the consumption benefit from the rise in the marginal comsuptionpropensity and take a considerable increase .Until 2040 , the rising marginalconsumption propensity is not enough to offset the impact of the decline of GDP,consumption annual growth rate drop to 2.6% in 2050. The trend of governmentconsumption changes in line with consumption, and the growth rate of governmentconsumption will be 4.3%.Exports fell the most obviously, and ultimately decrease byapproximate 8%, which is mainly due to the increase in the price index (19.7%) andthe improvement of terms of trade (14.3%).Due to the mechanism setting,theintroduction of the savings rate does not directly impact on the effective interest rate.The overall investment is in stable condition, on the one hand, the overall situation isquite good, is directly stimulating investment, there is a total pull effect; On the otherhand, the decline in employment has brought the increase in the price of labor, risingdemand for capital goods, the expected return increase lead to investment rising, thereis a substitution effect, and therefore investment demand will increase slightly.Considering the structure of expenditure GDP, the ratio of household consumption

and government spending show a substantial rise, which respectively increase by13.3% and 6.2%, and become the main economic driving point, which shows thepositive impact of population aging on the structure adjustment of China's GDP.While at the same time, the ratio of exports show a substantial decline (27.1%), theproportion of imports rebound slightly (2.6%), to effectively alleviate China's largetrade surplus ,indicate that there is indeed a close correlation betweensaving-investment gap and current account surplus (Fan Gang, Wei Qiang,2009).Theaging of the population will reduce the saving-investment gap in household sector andhelp balance the internal and external equilibrium. The investment ratio maintain nearthe baseline and finally drop by 1.1%.(3)(3)(3)(3) TheTheTheThe structurstructurstructurstructureeee effectseffectseffectseffectsThe aging of the population form a significant impact on industrial structure.

Affected by the consumption’s positive pull, the primary industry and the tertiaryindustry output grow significantly, remaining above the baseline, relatively increasingby 5.1% and 3.3%. After 2031-2035, both of them subsequently began to fall.Accompanied by the overall economic situation, the primary industry which islabor-intensive finally drop by 2.1% compared with the baseline and the tertiaryindustry drop by 1.6%.Among them, wheat (3.6%), cereals (3.2%) is mainly affectedby the consumption which is growing steadily; considering the tertiary industry,research (7.5%), social welfare (14.6%), education (13.3%) grow rapidly.Export-intensive industries are damaged seriously , such as textiles (-37.3%), motormanufacturing industry (-27.2%) fell significantly and at the same time cause theupstream industry such as the ironmaking industry (-20.5%), electronic componentsmanufacturing (-32.3% ) being subjected to varying degrees of impact, common causesecondary industry output fell significantly (16.6%), the ratio of secondary industry inthe proportion of the national economy drop by 5.2%.

-20

-15

-10

-5

0

5

10

b01b-r01r-2011

b01b-r01r-2016

b01b-r01r-2021

b01b-r01r-2026

b01b-r01r-2031

b01b-r01r-2036

b01b-r01r-2041

b01b-r01r-2046

b01b-r01r-2051%

1 aff

2 ind

3 srv

Figure 2: Sim0 the three main industries output relative change

4.4.24.4.24.4.24.4.2 ResultsResultsResultsResults analysisanalysisanalysisanalysis underunderunderunder thethethethe situationsituationsituationsituation whenwhenwhenwhen savingsavingsavingsaving equalsequalsequalsequals totototo thethethethe investmentinvestmentinvestmentinvestment ininininthethethethe longlonglonglong runrunrunrun(1)The(1)The(1)The(1)The effecteffecteffecteffect onononon growthgrowthgrowthgrowthAfter endogenous saving rates introduced, the negative impact of population aging

on macroeconomic will be significantly strengthened. Force the investment equal tosaving will lead a significant impact on macroeconomic with the aging of thepopulation. Mainly due to a direct impact on the amount of investment. The decline ofthe savings bring equivalent decline in investment. Although at the first stage of thesimulation, the total economic impact is not so obvious, but as time progresses, thesteady decline in investment makes GDP deceleration point appears in 2031-2035 andultimately below the baseline 11.0%, with reducing the GDP growth by 2%,muchmore serious than Sim0.It indicates the in the long term, the negative impact of theaging of the population on investment and macroeconomic should not beunderestimated. Consumption, government spending is still growing, but the increasewill be slowed (11.4%) accompanied by a decrease in real GDP. Export prices riseslowdown (8.7%), improving terms of trade (8.9%) , net exports goes on a furtherdecline(17.6%).Due to force the investment equal to saving, in the short run ,the real interest rates

rise significantly; Subsequently, accompanied by a slower decline in savings andinvestment, the real interest also rises slower. But as the long term concerned, if thesavings gap can not be effectively compensate, the burden of forcing real interest ratesrise will be more significant. Thereby affecting the total investment formation.Considering the factor markets, the real wages rise slowly, above the baseline 5.0%

in 2050, less than 9.0% in Sim0. Under the negative effect of long-term investment,the macro-economic situation is not optimistic with significant decrease inemployment (12.2%) and a strong impact on the labor market; capital stock will bedamaged seriously (10.6%). Under the impact of the combination of the both of thesupply of labor and capital stock, GDP growth will be weak.((((2222)))) TheTheTheThe structurstructurstructurstructureeee effectseffectseffectseffects

The output of the three major industries on the basis of Sim0 will be furtherreduced. But the aging of the population is still expanding in the structure view of theprimary and tertiary industries accounted for the proportion of the gross nationalproduct. Secondary industry by the negative impact of investment will dropsignificantly (22.5%), the output will be below the baseline 18.3%, facing a bigadjustment. Affected by the negative impact of investment (22.4%) and the positiveimpact of consumption, the tertiary industry output decrease 8.9% compared withbaseline. Promoted by consumption , the primary industry grow better than the othertwo industries, the proportion of the national economy gradually increase to 29.8%.From the industry perspective, textile and apparel, industrial manufactured goodsrepresented by the export-intensive and labor-intensive industries fall significantly; atthe same time, capital-intensive industries such as mechanical and electricalequipment manufacturing industry damage greater (26.6%). Driving the upstreamdecline in industrial output, such as cotton (22.2%), iron and steel (21.6%); whilesome industries have been influenced positively, such as pork (2.3%), education(6.7%), social welfare (7.4%), medical (6.5%).

Table 7 The macroeconomic results in Sim0 and Sim1

2020 2030 2040 2050

Sim0 Sim1 Sim0 Sim1 Sim0 Sim1 Sim0 Sim1

Macro variables

Residents

welfare(GNP)3.57 1.38 7.03 2.41 13.34 3.22 14.41 1.13

Expenditure GDP 1.04 0.34 1.32 -0.59 -0.74 -4.89 -5.48 -10.98

Household

Consumption6.43 5.53 12.40 9.29 20.90 14.60 19.15 11.37

Investment 0.64 -3.81 0.54 -7.29 0.49 -16.61 0.22 -21.90

Government

spending6.45 5.54 12.42 9.30 20.89 14.60 19.15 11.38

Exports -5.58 -2.76 -12.75 -7.57 -29.53 -19.34 -40.84 -28.85

Imports 1.22 -0.74 1.92 -1.90 2.14 -6.33 -0.06 -11.27

Factor Markets

Employment 1.36 0.56 1.46 -0.36 -1.61 -5.38 -7.67 -12.18

Capital Stock 0.29 -0.24 0.49 -1.82 0.62 -5.13 0.69 -10.63

Real Interest Rate 0.00 0.007 0.00 0.07 0.00 0.10 0.00 0.035

Rate of Capital

Return0.003 -0.007 0.005 -0.083 0.002 -0.117 -0.004 -0.047

Nominal Wages 2.43 0.92 6.45 3.17 18.41 10.95 29.67 18.46

Price Index

Average Factor

Price2.85 1.17 6.61 3.52 16.84 10.07 25.81 16.59

Consumer Price

Index3.02 1.72 6.26 3.78 14.10 9.01 19.70 13.34

Export Price 1.47 0.62 3.50 1.92 9.14 5.40 13.99 8.71

Terms of Trade 1.50 0.64 3.58 1.97 9.36 5.54 14.33 8.94

Note: the values are five-year cumulative change compared with the baseline

5.Proposals5.Proposals5.Proposals5.Proposals andandandand ConclusionConclusionConclusionConclusion5.15.15.15.1 ConclusionConclusionConclusionConclusionThis paper uses a computable general equilibrium model (MCHUGE)

quantitatively analyses the potential impact of aging on macro-economy in the nextfour decades. From the economic point of view, (1) The long-term decline in the totalpopulation and rise in dependency ratio caused by population aging ,through laborsupply, consumption, savings, and other channels, to drive down economic growth.The main negative effects will be represented as the long-term pressure, that is, theinvestment gap brought by the potential labor supply decline and the decline in thesavings rate. (2) The rise in average consumption propensity will improve the currentsituation of lack of domestic demand, showing the positive side of aging population.(3) Due to the positive role the consumption play , the negative effects of the aging ofthe population will not appear in the short-term ; mainly comes from long-termpressure. It seems that the turning point of the potential economic growth will appearin 2030 and will drop the potential economic growth by 2% in 2050. (4) Changes inthe population at the same time bring the long-term inflationary pressures, the priceindex rise significantly, leading to improve the terms of trade, reducing and reversingthe current situation of China's current account surplus. (5)Considering the futureinvestment paths, the financial market reform and the degree of long-term savingspotential gap will determine the future investment path.From the structural point of view, the expenditure GDP structure will face

long-term adjustments. Economic structure has shifted passively towardsdemand-oriented and service-based economy, and the pulling effect of export andinvestment are supposed to face challenges. At industry level, the secondary industryaffected negatively by exports, investment rate of return will face greater challenges.5.25.25.25.2.Proposals.Proposals.Proposals.Proposals(1)Industrial policy, layout in advance, to guide the industry toward aging .China

should fully draw on the successful experience of Japan's aging industrial policy,vigorously develop the silver economy, and tap new growth areas such as medicalinsurance, travel, vacation, sports and education industry. According to the maturity ofthe various needs of the elderly as well as the characteristics of the development ofdifferent areas of the industry for the elderly, conduct a targeted industrial policy andrealize the industry benign development.(2)Macroeconomic policy, with the advent of aging population, the macro-policy

objective should gradually reduce the controlling target of economic growth and turn

to optimize the economic structure target. At the same time, the positive side of agingin consumption pulling can’t be eliminated. And when considers the investment asanother pillar to support domestic demand growth, government should seek to speedup the reform of financial markets, improve investment efficiency and expand thechannels of capital supply.(3)In addition, strengthening human capital investment, especially talent education

which is future economic structure -oriented is a valuable long-term work. Thechanges in the structure of the labor market indicated by the problem of employmentdifficulty of college students bring the service industry in transition a large amount offactors of comparative advantage.The article also has some shortcomings, such as static expectations. Introducing

dynamic expectations and building a financial CGE model to deeper contact thefinancial and economic relationship, both of these are the future research directions.

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