China’s economy will face an age-old challenge

China’s population fell last year and will continue to do so throughout the 21st century.

Data from the United Nations Population Division’s 2022 Revision of World Population Prospects has shown a sharp fall in China’s fertility rate from 1.81 births per woman in 2017 to 1.16 in 2021.

This trend is based on data supplied by the Chinese government, indicating the country’s belated acknowledgement that fertility rates are very low.

The UN projects that China’s fertility will rise very slowly and evenly from its low point in 2021 to reach 1.48 births per woman by 2100.

This seems an unlikely scenario based on the experience of fertility trends of Chinese populations in Hong Kong, Taiwan and Singapore and, importantly, in China’s largest cities. Among these populations, fertility has fallen even further and remained low for many years.

When a country’s annual fertility rate falls rapidly to a very low level, it is often because women of younger childbearing age delay their first birth. Women of older childbearing ages tend to limit the number of children that they have.

The age at which women have their first birth has been rising rapidly in China. But there is still scope for further increases as female education levels rise, employment opportunities for women expand and China urbanises.

Emerging trend

There is an emerging trend in some advanced countries, including Japan, South Korea and Italy, that what was initially thought to be a delay in first births was the result of a higher proportion of women opting to have no children.

This decision is influenced by the high costs of having a baby in economies where employers discriminate against mothers – or potential mothers – and because social institutions provide little support for working women with children.

This behavioural pattern is likely to occur in China as well.

A more reasonable scenario than the UN’s prediction is that fertility might remain very low in China for many years to come. The nation’s population is projected to fall by 658 million from 2022 to 2100.

During the same period, the percentage of the population aged 65 and over is projected to rise from 14% to 41%.

Assuming age and gender labour force participation rates are constant at 2010 levels, the size of China’s workforce would fall from 796 million in 2022 to 348 million in 2100 – a fall of 56%.

While these changes will have major impacts on the economy of China, how these will manifest is unclear because there is no precedent of a population falling by such vast numbers.

Long-term population projections carry a high degree of uncertainty because governments take actions that change the demographic future.

Because of this, only the short- to medium-term implications, roughly from 2022 to 2050, are considered here. China will try vigorously to change its projected demographic future, but a substantial population decline by 2100 is inevitable.

Older workers

In the short to medium term, from 2020 to 2040, China’s workforce will fall by only 8%. This is because employment among older workers will prop up certain sectors.

There is also scope for older worker rates to increase due to government policy – a potential offset to the projected fall in the labour force. Older people will be healthier and have the incentive to continue working as most have little or no pension.

Yet older workers are overwhelmingly low-skilled.

To continue its economic growth from a middle- to high-income economy, China must shift from low-skill, labour-intensive production to a higher value-added one based on advanced technologies.

This approach has been successful in Japan, South Korea and Taiwan and the transition is already well underway in China, which has almost half of the world’s industrial robots and is a manufacturer of electric vehicles, lithium-ion batteries and photovoltaic solar panels.

A young, well-educated workforce helps to support this transition. The 2014 National Transfer Account for China shows the very unusual pattern that incomes are highest for those aged 25 to 34 and fall away very sharply as age increases.

High-productivity workers are young and well-educated. From 2020 to 2040, they will age and increase labour productivity across the labour force. Each new generation entering the workforce will be better educated than its predecessors.

This should ensure healthy economic growth in China over this period.

A challenge to this scenario is that the number of young workers aged 25-39 is projected to fall by 23% between 2020 and 2040 with little scope for increased participation rates among this age bracket.

The challenges will multiply after 2040 as the number of young workers in this age group falls even more rapidly for a total fall of 54% from 2020 to 2060.

Major problem

With present patterns of private and public consumption, population ageing does not present the same challenges as it does in most advanced countries. Per capita consumption among older people in China is relatively low and is no higher than for adults at younger ages.

This is because pension, health and aged care systems are poorly developed and do not involve the high levels of expenditure found in Western countries and Japan.

In contrast with Western countries, per capita consumption for school-age children in China is much higher than for adults. In the short- to medium-term, fewer children imply reduced expenditure – an advantage to the economy.

While demographic trends may not pose a major problem for China’s economy in the next 20 or 30 years, on current trends, the negative impact is likely to be severe beyond 2050.

Peter McDonald is an Emeritus Professor of Demography in the School of Demography, College of Arts and Social Sciences at The Australian National University.

This article first appeared in the most recent edition of East Asia Forum Quarterly, ‘China Now’, Vol 15, No 1.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.