Can China’s economy overcome its demographic deficit?

How big a role will China’s demographics play in its economic prospects? Inescapably, a big one. Indeed, it must be one of the most important factors in determining China’s economic prospects. Even if there remains good potential for output per worker to rise, because China is a relatively poor country, a declining population and workforce will slow the growth of the economy. So, what might this mean for its future?

Start with the fundamentals. UN data shows that the average number of children born to each woman in China has plummeted from an average of six in the 1950s and 1960s to an average of 1.7 in the 2000s and 2010s. In the 2020s so far, it is down to 1.2, slightly below Japan’s, though above South Korea’s.

A plausible explanation is that urbanisation leads to a sharp decline in the desire for children, especially among educated women. China’s now abandoned one-child policy accelerated its transition to low fertility and also created a huge problem of gender imbalance: according to the US census bureau, the ratio of boys to girls at birth peaked at 118 to 100 in 2005. But the fertility decline would ultimately have happened anyway. Even China’s mighty state cannot force people to have children they do not want.

As a result, China’s population is being transformed, on multiple dimensions. According to the (relatively conservative) UN medium projections, it will shrink from 1.425 billion in 2020 to 1.313 billion in 2050. China’s share of world population will also fall, from 22 per cent in 1980 to 18 per cent in 2020 and 14 per cent in 2050. But India’s share is forecast to be 17 per cent by 2050.

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More important than this, striking though it is, is the change in the age composition of the population. While the overall population is forecast to shrink by 113 million between 2020 and 2050, the number of people over 65 will rise, according to these projections, by 215 million, while the number of those below the age of 20 will shrink by 137mn and those between 20 and 64 will shrink by 191 million. As a result, those over 65 will jump from 13 to 30 per cent of the population. Those aged under 20 will shrink from 24 to 15 per cent and those aged 20 to 64 from 64 to 55 per cent. By 2100, suggests the UN, the share of the over-65s will be an astonishing 41 per cent of the population. This would be a country just full of old men and women.

Is this going to be manageable?

Two possible ways out can be ignored. China is far too big and also almost certainly too hostile to take the route of mass immigration. Again, even if the fertility ratio could be raised substantially and soon, it would not have any effect on the working-age population in less than 20 years and not much effect for many years after that: children take a long time to reach maturity. Moreover, even if the fertility rate were indeed raised, remember that there are far fewer women of child-bearing age than there were decades ago. Three decades of fertility below replacement, plus that hugely socially destructive bias in favour of males, have reshaped the demographic present.

A country top-heavy with the old will have lower educational standards and be less dynamic than one dominated by the young

Two relevant options do, however, exist: internal migration and later retirement. UBS argues that reductions in the labour force due to ageing can be more than offset, at least over this decade, by moving workers from the still-large farm population and by raising the retirement age. The hukou system, which controls internal migration and leaves many Chinese second-class citizens where they live, will have to be abolished. That is both economically essential and socially just. Moreover, at present, the retirement age is still 60 for men, 55 for white-collar women and 50 for women working in factories. These ages can and must be raised.

In addition, note that China’s most embarrassing problem today is high youth unemployment, so much so that the data is no longer published. That indicates too little demand for labour, not those dreaded labour shortages, at least today. Also, even in 2050 the dependency ratio will be well below where it was in 1950. The difference, of course, is that back then the dependants were children, not parents. Yet bringing up and educating children is also expensive. One of the reasons we are so much more concerned about the former than the latter is surely that our children are more valuable to most of us. Children are also, of course, the future and the aged the past. In addition, a country top-heavy with the old will have lower educational standards and be less dynamic than one dominated by the young.

What is clear is that with the population of working age forecast to shrink at an average rate of 0.8 per cent from 2020 to 2050, 0.5 percentage points faster than the overall population, the rise in gross domestic product per head will be that much slower than that of GDP per worker, and GDP growth will be slower still. Nevertheless, if output per worker rises fast enough, growth in GDP per head could still be quite swift. Moreover, this is not at all impossible, because productivity is so far below levels in countries closer to today’s technological frontier. Indeed, China is in fact showing quite a bit of innovation – just look at electric vehicles.

Yet sceptics are right that this is not going to happen without a great deal of reform. Structural issues will have to be overcome. In addition to the reforms to internal migration and retirement outlined above, it will be essential to raise the educational standards of the young people they have, as well as encourage the most innovative economy possible. It will also be necessary to overcome the external constraints. Will Xi Jinping’s state be able to meet such big challenges? That is a big question, to which I will return. – Copyright The Financial Times Limited 2023