China economy

Demographic time bomb? China’s army of young, educated and willing workers will keep economy on track

Frederic Neumann says despite worries about population ageing, China can still tap a steady supply of able workers

PUBLISHED : Thursday, 03 March, 2016, 5:00pm
UPDATED : Monday, 30 May, 2016, 5:09pm

There are plenty of dire predictions around. China’s economy might suffocate under a mountain of debt. If not, then pollution – witness Beijing’s toxic skies – could bring growth to a screeching halt. If these arguments fail to impress, sceptics point to China’s supposed demographic time bomb: the country’s population is among the most rapidly ageing in the world. Having fewer workers, doomsayers argue, will put a dent in China’s bright future, decimating its impressive growth rates, which, for all the economy’s recent travails, are still the envy of the world.

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Well, the demographic issue at least will turn out to be more of a damp squib. True, at the surface, China is beginning to grapple with one of the most severe demographic challenges in living memory. Due to its one-child policy, the country is now ageing fast. By some estimates, its working-age population has started to shrink this year as more citizens retire than join the labour market.

Over the coming decade, some 3 million fewer workers will be available every single year. Parallels with Japan come to mind: the number of Japanese workers has steadily declined since the mid-1990s, leading to two decades (and counting) of stagnant growth.

It’s not that Beijing officials haven’t noticed. They recently switched to a two-child policy, after allowing parents without siblings to have two children. That might help, but it’s not going to arrest the decline in the labour force. To stabilise population growth, on average, 2.1 births are needed per woman. Even under optimistic assumptions, the current average of 1.7 might only rise to perhaps 1.9. One challenge is that few young Chinese are keen to have larger families, not least because of the soaring costs involved.

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That’s all troubling. But there are two reasons why China’s alleged demographic time bomb will fail to detonate the way pessimists allege. The first has to do with the enormous reservoir of underused workers in the country. A mere 54 per cent of Chinese officially reside in cities. That still leaves some 620 million Chinese people in the countryside, not contributing as effectively to economic output as their counterparts in urban areas.

How many of these might conceivably move to cities to join the modern economy in the coming years? Not everyone will pack up and leave, of course. The elderly might stay put, and many of the young and adventurous have presumably already left. But, even then, there are still some 190 million rural residents under the age of 40. Better jobs and higher pay should ultimately lure many of them into factories and service jobs. Even assuming that only half of them take the plunge, that would add some 100 million workers to the urban workforce in the coming years, roughly the population of the UK and South Korea combined.

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These migrants will certainly not move all at once: the process could take 10 or 20 years. That means, conservatively estimated, that some 4 to 8 million workers could join the urban labour force each year for the foreseeable future, comfortably offsetting the impending surge of retirements.

Today, Chinese job applicants comfortably match their global peers in education, ambition and creativity

But will they come? So far, yes: the proportion of people living in urban areas has doubled since the late 1980s. Life amid the paddies doesn’t match the lure of city lights. Easier residency requirements, recently relaxed, should help to sustain migration. Economics, too, exerts a pull: wherever labour shortages emerge due to rising retirements, wages climb, and migrants arrive.

The second reason not to fret is the rapid improvement in educational attainment. Those currently retiring were educated during the latter days of the Cultural Revolution or at the very beginning of the country’s spurt towards prosperity. At the time, people managed six years of schooling, on average, with its quality no match for the standards of the modern era. Today, young Chinese enjoy an average of nearly 11 years of schooling, with the number of university graduates having jumped from 1 million in the early 1990s to more than 7 million last year.

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The latest global Pisa study of educational attainment by the OECD, for example, shows that 15-year-old students in Shanghai top the world not only in mathematics and science, but also reading. It is easy to dismiss this finding as representing a mere subset of the country, and even of the city. But the quality of Chinese education more broadly has undoubtedly improved by leaps and bounds in recent decades. Today, Chinese job applicants comfortably match their global peers in education, ambition and creativity.

And they are increasingly globally minded: nearly 300,000 Chinese now study in the US.

None of this is to say that China’s ageing population doesn’t throw up challenges. It will require more resources to be devoted to health care and pensions. Wage pressures could also climb further, requiring yet more productivity gains to maintain stable prices and protect corporate profitability. But, by itself, the demographic shift will not be the undoing of China’s economic miracle. The country may be ageing, but there are still plenty of eager and increasingly better-educated workers left to keep the wheels turning for many more years.

Frederic Neumann is co-head of Asian economics research at HSBC