Four ways China’s economy can rise to the population challenge

The three-child policy is unlikely to reverse the demographic slide, but China can mitigate likely impacts on the economy
Besides raising the retirement age, it could make the most of its educated workers, adopt automation and consider outsourcing

Aidan Yao

Published: 4:30pm, 16 Jun, 2021

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China’s latest census data, along with the announcement of the three-child policy, has turned the spotlight on the country’s demographic situation again. And the picture isn’t pretty.

For starters, the country only narrowly escaped the fate of seeing a population decline. Contrary to fears that China’s population had dropped below 1.4 billion, the latest census data showed continued growth, although the population increase over the past decade – 72 million – was the smallest since the 1950s.

What’s more worrying is the worsening demographic structure. The elderly (aged 65 and above) accounted for 13.5 per cent of China’s population in 2020, a jump from 8.9 per cent in 2010. The share of the population aged 14 and under increased slightly over the decade, from 16.6 per cent to 18 per cent. The working-age population (aged 15 to 60), on the other hand, shrank almost 7 percentage points to 63.4 per cent.

These mean that the dependency ratio – the non-working-age population over the working-age population – has deteriorated, with a growing unproductive group now relying on a shrinking working-age population.

Finally, the most worrying statistic of all is the sharp decline in the birth rate. The official data showed the number of newborns dropping to a near-record low of just 12 million in 2020, about 18 per cent lower than in 2019. While last year’s number may have been distorted by the pandemic, the persistent decline in China’s birth rate since 2016 is unmistakable. With a fertility rate of 1.3 children per woman, China now has one of the lowest population replacement rates in the world. If the trend is left unchecked, the country will face a grim future of accelerated population decline.

To be fair, an effort was made to arrest the decline in the birth rate when the one-child policy was relaxed in 2016. But after a brief uptick, the birth rate has continued to ebb. The failure of that first tweak to the birth control policy to raise the fertility rate should discourage optimism about the latest relaxation of birth restrictions.

To be sure, even if this policy change is effective, China’s demographic pattern will continue to worsen in the coming decades. The expansion of the aged cohort, along with the decreasing working-age population, is a result of low fertility and growing life expectancy over the past decades. Reversing the birth rate decline now will be crucial to avoiding a demographic train wreck in the very long run, though even this won’t change the direction of the population trend in the coming decades.

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So, against such intensifying demographic headwinds, what can China do to mitigate likely impacts on the economy? Here are a few options.

First, China could raise the retirement age, which is currently 60 for men and 50 or 55 for women: both are below the OECD averages of 64 and 63, respectively. Keeping people in the labour force for longer will not only slow the shrinkage in labour supply, but also alleviate pressure on China’s ailing pension system. This is reportedly under discussion in Beijing and could soon become policy.

Second, while it is difficult to increase the quantity of workers, improving the quality of workers is less difficult. The latest census data also showed rising education and urbanisation levels over the past decade. Having more capable people doing more value-added jobs in cities is exactly what China needs to boost productivity and keep the economy out of the middle-income trap.

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Third, to prevent an exodus of manufacturing due to labour shortage, China has devoted resources to developing its robotic industry and encouraged traditional factories to adopt automation. By letting machines take over jobs that require speed, precision and physicality, China will be able to increase productivity, offset rising labour costs and preserve its status as the “world’s factory”.

Finally, global outsourcing could be a solution to the labour shortage problem for some industries. Spreading supply chains to other countries with better demographic profiles can help Chinese firms stay competitive. Even though this means that jobs will no longer be in China, Chinese owners can still reap most of the gains from lower labour costs. In this regard, having jobs performed by foreign workers in less developed countries is no different from having them replaced by machines insofar as the labour-market impact is concerned.

All things considered, deteriorating demographics clearly represent a developmental challenge, but China still has some cards to play.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers