Why China’s three-child policy is unlikely to improve the gloomy long-term economic outlook

The latest census has revealed a significant slowdown in the population growth rate, fertility rate and number of migrant workers
Given that productivity growth has also been declining, the prospects for the economy remain grim

Hao Zhou

Published: 1:30am, 2 Jun, 2021

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China’s once-in-a-decade census report, released in mid-May, shows a further slowdown in the country’s population growth. Between 2010 and 2020, the population grew at an average of 0.53 per cent annually, the slowest rate in any decade since China’s first census in 1953.

One of the reasons for the significant slowdown is the former one-child policy, which aimed to prevent the population from growing too fast. However, around 10 years ago, when the last census report was published, Beijing realised that this sharp slowdown would cause significant economic and social problems.

Therefore, the authorities gradually relaxed the policy and shifted to a two-child policy in 2015. This week, the Politburo, China’s top decision-making body, announced that a three-child policy will be adopted during the 14th five-year plan, clearly reflecting the urgent need to address these demographic challenges.

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China 2020 census records slowest population growth in decades

However, it remains open to question whether the three-child policy will be effective. After the introduction of the two-child policy, the number of births did increase, slightly, in 2016 and 2017. However, this was only a temporary phenomenon, as the number later fell significantly.

In 2020, only 12 million babies were born in China, the lowest total in six decades. Given the minuscule effect of the initial relaxation of birth controls, it questionable whether the complete lifting of restrictions, which is now under discussion, can alter the unfavourable trend in the birth rate in the long term.

China’s total fertility rate – the average number of children born to women during their reproductive years – has dropped to the 1.3-1.7 range in the past decade, far below the 2.1 level that would be needed to sustain the current population level in the medium to long term.

In the meantime, there have been online discussions on the concept of “neijua”, or “turning inwards” in China, which is seen to somehow explain the country’s low birth rate. High property prices, heavy workload and intense competition for educational resources have made the young generation reluctant to have children.

While the government has been attempting to contain property prices and optimise schooling resources over the past few years, there is little sign that young people are more enthusiastic about becoming parents.

While the total population is still growing, the working-age population peaked in 2010 and has declined since then.

A United Nations projection in 2019 suggests that even in the best-case scenario (with the fertility rate rising to 2 over time), the share of China’s working-age population will continue to fall in the coming decades before stabilising around 2055.

However, China’s total fertility rate, at around 1.3 in 2020, is in fact already worse than the most pessimistic scenario presented by the UN, in which the share of 15-64-year-olds will fall steadily until just before the end of this century, when it will be less than 50 per cent.

The demographic trend is also showing up in the number of migrant workers. According to a separate report released by China’s National Bureau of Statistics, growth in the number of migrant workers has slowed over the past decade. In 2020, for the first time, the number of migrant workers was lower than in the year before.

China census delay may be due to coronavirus impact on migrant workers

This might be due in part to the pandemic and its economic consequences, but the underlying trend will probably point downward in the coming years, too. Obviously, the labour potential of China’s rural population, which for a long time seemed almost inexhaustible, is gradually being depleted.

In the meantime, China’s migrant workers are also getting older. People aged 40 and above now comprise about half the total pool of migrant workers, versus about 30 per cent in 2008.

As a result, migrant worker mobility has declined as the data suggests more want to work in their home province rather than make the long journey to coastal regions.

The case of Japan shows what these demographic trends will mean for the Chinese economy. Japan’s potential growth rate has significantly slowed since the productive labour force started to shrink in the 1990s, and the rising dependency ratio has put more pressure on the country’s pension and health care systems.

If history is any guide, with the working-age population shrinking, China’s economic prospects will turn gloomier as overall output growth derives from the growth rate of the working population and its productivity.

The projections show that the working population will decline in the years ahead, and China will probably not be able to compensate for this with a significant rise in elderly participation rates.

Indeed, the government has already proposed raising the retirement age; however, given the strong public dissatisfaction with this move, Beijing can only proceed very slowly.

Therefore, growth has to be based on higher productivity per worker. But this looks unlikely given that productivity growth has been declining. So, all in all, demographic trends imply continuously lower growth rates for the Chinese economy in the coming years.

Hao Zhou is senior emerging markets economist at Commerzbank