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