In the 1970s, when concerns about overpopulation in China were at their zenith, government officials designed a pithy messaging campaign. Authorities exhorted citizens to follow a philosophy of wan, xi, shao (later, longer, fewer) in a bid to bring down birth rates, and thus ease pressure on the environment and natural resources.
In the decades since, citizens have certainly taken this advice to heart—perhaps a little too zealously. The once-in-a-decade census results published in May 2021 showed that the total fertility rate is now among the world’s lowest at 1.3. New births were a mere 12 million last year—the lowest since 1961—while society is greying fast, with the working-age population declining by 40 million compared to the previous poll. Although the country’s total headcount inched up in the ten years to 2020, population growth slowed, and will likely go into reverse within a few years—earlier than organizations such as the IMF or United Nations had predicted.
From paupers to politicians, rural residents to city slickers, this bleak demographic panorama will have profound implications for all Chinese citizens. The structure of the domestic economy will inevitably change as the population shrinks and ages, as will the way China interacts with the outside world. And policymakers will be tested: They will have to fill the holes in the threadbare social safety net and secure a sustainable pension system, while simultaneously grappling with longstanding issues crimping productivity and accelerating the transition to a new growth model.
- Show me the money
One key consequence of China’s accelerated population aging will be greater spending pressures. With the total dependency ratio set to rise from a little over 40 today to around 67 by mid-century, the government will need to allocate more resources to health and social care—an area where China invests far less than developed nations. And pension costs could balloon, as the hundreds of millions born during the baby-boom years of the 1960s and early 1970s drop out of the workforce.
Current fiscal space is constrained. Our panelists expect the official budget shortfall to remain sizable out to 2025, and the real fiscal deficit will likely be far larger after adjusting for off-budget spending. Central government debt is seen almost doubling from its 2019 level over the same period. The IMF’s measure of “augmented” public debt, which takes into account government-managed funds and the activity of local government financing vehicles, is forecast to rise to over 100% of GDP in the next few years.
There are some signs the government is now adopting a more cautious fiscal stance—credit growth has slowed notably so far this year for instance—yet this is just a first step. “China’s debt dynamics underline the urgency of delivering the assumed baseline consolidation,” said the IMF in a recent report. “It strikes a balance between the need to protect the post-pandemic recovery while ending a 10-year period of increasing deficits and stabilizing debt as a percentage of GDP by the end of the decade. This would provide the government with some additional fiscal space to accommodate pension and health spending pressures as the population ages.”
On healthcare, boosting spending is not just necessary, it could also be desirable. A lack of social welfare has kept households’ precautionary savings high in recent years, depressing private consumption and skewing the economy towards increasingly unproductive investment, despite government attempts at rebalancing. Consumer spending is worth well over 60% of GDP in the U.S; in China, the corresponding figure is less than 40%.
When it comes to pensions, however, simply increasing government expenditure is not a sustainable option. Structural changes are needed: Without them, the country’s main state pension fund is expected to run dry by 2035, according to a 2019 report by the Chinese Academy of Social Sciences. A crucial step will be raising China’s retirement age—one of the world’s lowest—which has remained unchanged for decades at 60 for men and 55 for female white-collar workers.
Fearful of jeopardizing social stability, the government has so far proceeded gingerly. The current five-year plan announced in March promises to raise the retirement age “in a phased manner”, yet similar pledges made in the two previous five-year plans amounted to little.
If implemented in isolation, such a reform also has the potential to backfire. With so many Chinese parents relying on grandparents for child-rearing, keeping people working for longer could remove this vital element of support, weighing on the already-low fertility rate and accelerating population aging.
The headline census data masks important intra-territorial differences. The Chinese are increasingly city-dwellers. Notwithstanding lingering restrictions under the Hukou system—which discriminates between urban and rural residents in access to public services—the urbanization rate rose 14 percentage points in the last decade to 64%.
Young people have flocked to the dynamic, warmer coastal areas of China’s south-east, at the expense of the northern rustbelt provinces. As an example, the population of Guangdong province—home to Guangzhou and Shenzhen, two of China’s most technologically advanced megacities—rose by over 20 million in the last decade, while that of Heilongjiang province in the northeast fell 17%.
This transfer of talent from north to south has left the pension pots of some provinces flush with cash, while others have moved deeper into the red: The Chinese Academy of Social Sciences’ 2019 report highlighted that the pension balance of Guangdong was nearly equivalent to that of the next nine provinces combined.
The government’s current five-year plan pledges to reform the Hukou system in a bid to speed up urbanization. Yet even without public intervention, internal migration will likely persist as younger citizens are attracted by the greater professional opportunities on offer in southern metropolises. This will deepen the demographic divide between provinces, necessitating more financial transfers to those which see their populations age faster and fiscal reserves dwindle.
Such a trend will be painful for the country’s left-behind regions. But greater urbanization will boost economic output—city-dwellers are far more productive than their rural counterparts. If this occurs together with greater health and social spending unleashing pent-up private consumption, and a delayed retirement age boosting labor force participation, it could fuel growth for years to come—even in the face of an aging, declining population.
- From made in China to created in China
However, extracting more output from each urban resident will be the key to China truly reaching developed-country status. Despite huge progress in recent decades, average sectoral productivity is only around one third of the level of top-performing nations, and less than 20% in areas such as business services—indicating still-enormous potential for catch-up growth. Plus, China’s competitive advantage in low-cost mass manufacturing—the cornerstone of its vertiginous rise up the global economic rankings in the past decades—is likely to be eroded going forward as the workforce shrinks and labor costs climb. Indeed, this is already happening, with many firms beginning to diversify their supply chains beyond China. Vietnam, for instance, is emerging as a global powerhouse in the production of basic electronics.
China’s future lies elsewhere, in less labor-intensive, higher value-added sectors. The government is all too aware: China’s current five-year plan pledges to increase R&D spending by more than 7% annually, while 12 top universities were recently instructed to build technology centers in a bid to rival leading U.S. research institutions. Beijing is also funneling vast amounts of cash towards high-tech sectors such as semiconductors and artificial intelligence. Foreign firms are now able to participate more freely in the financial services sector, while rules restricting FDI have been eased.
This flurry of policy announcements has come amid mounting headwinds. Trade tensions could harm export prospects. Frayed relations with the West may impede technology and knowledge transfers, hindering efforts to upgrade the country’s industrial base and modernize business practices. And the state-led development push risks generating economic distortions and inefficiency, particularly as SOEs are far less productive than their private counterparts.
For the next few years, our panelists continue to see respectable economic growth, averaging around 5% from 2022–2025. Over the period, China will continue to close the gap with the U.S.: Nominal GDP is expected to average around 85% of the U.S.’s in 2025, up from close to 70% today. Longer term, the country’s dismal demographics are all but certain to dent growth—the question is by how much, and whether the government will be able to partially compensate via reforms.
For other countries, a slowing, aging China is a double-edged sword. Those who have for years depended heavily on the country’s voracious demand for goods—particularly primary commodities—have the most to lose, as Chinese industry grows leaner and greener. The days of China single-handedly lifting other economies out of recession, as in the wake of the Global Financial Crisis, are unlikely to be repeated. At the same time, Asian neighbors will benefit from the continued relocation of low-cost manufacturing.
Moreover, China’s retreat from being the workshop of the world has the potential to add to global price pressures. Together with greater protectionism, fiscal activism among governments and improved worker bargaining power as labor grows scarcer in many countries, this could revert the global deflationary trend observed in recent decades. While welcome news for those developed countries which have suffered below-target inflation for years, emerging nations could be forced into undesired monetary tightening.
Some analysts are fairly sanguine about China’s population decline. Ho Woei Chen, economist at United Overseas Bank, is one: “While the changing demographics could be a constrain on China’s economic growth rate in the coming years,” she says, “there would be offsetting factors including the large size of its population and economy as well as rising income and improvement in productivity from technology adoption.”
Mark Williams, chief Asia economist at Capital Economics, is less upbeat: “China will continue to grow faster than the U.S. in the next few years. But if its productivity growth continues to slow, as seems likely, China’s catch-up will stall around 2030. After that, it will go into reverse because China’s workforce will then be shrinking by more than 0.5% each year. The U.S. workforce will be expanding throughout the next 30 years, supported by higher fertility than in China and by immigration.”
Which of these two visions proves correct will have huge geopolitical consequences. A world where China is able to power ahead of the U.S. economically would likely also be one in which China has greater sway over key global institutions such as the IMF, United Nations or World Bank, more leverage in trade talks and the power to set standards in emerging economic sectors. The yuan could even come to threaten the dominance of the dollar as a reserve currency, aiding Beijing’s long-term goal of breaking Washington’s stranglehold over the global financial system.
On the other hand, if China fails to overtake the U.S., the Asian giant would likely continue growing richer in per capita terms, and remain a formidable force on the world stage. But the U.S. would retain its central role at the heart of the global economy.
- Three’s a crowd
These disquisitions would become largely academic if China were simply able to avoid population aging altogether. Indeed, the government has made policy announcements with this objective in mind, most recently by allowing couples to have up to three children, and pledging “supportive measures” aimed at making it more feasible to raise a family.
However, the two-child policy implemented from 2016 failed to lead to a sustained uptick in births. For many Chinese people, the cost of child-rearing simply remains too daunting—and the professional sacrifices required of women in particular are too great. Raising the bar from two to three is unlikely to seriously move the dial, without a multi-pronged approach addressing a host of problem areas, such as sky-high education fees, lack of parental leave, long working hours and high housing costs.
Other aging societies offer a discouraging precedent; few have had much success at lifting their own low fertility rates back towards the replacement value of 2.1 births per woman, despite many governments showering their citizens with financial incentives. This is partly a reflection of changing social mores—people simply desire fewer children now than in the past.
Even if China somehow manages to go against the grain, any baby boom today will take a few decades to filter through to improvements in the labor force. The short-term impact could even be slightly negative, to the extent that women reduce their participation in the jobs market in order to raise children.
It thus seems a near inevitability that China will continue to age and slow in the coming years. Whether its politicians are able to overcome these adverse demographics to maintain the country’s incredible economic run is less certain. No country has yet managed to get rich against a backdrop of such rapid population aging.
“The next few decades will be crucial ones for China’s leadership,” said Steven Burke, East and South Asia economist at FocusEconomics. “Rich nations are also facing fast-ageing populations, but they do so from a position of strength, given their high accumulation of household and company wealth. Beijing will be looking to show the world that it is possible to successfully adapt to a greying society while simultaneously moving from developing to developed country status.”