China’s population decline is only a small part of a larger demographic problem

Much has been made lately of the fall in China’s population, but the real concern is its dwindling workforce, which peaked about a decade ago
Still, in that time China’s economy has continued to grow, putting it alongside places facing similar demographic challenges like Japan and Europe

Deng Jing-Yuan

Published: 4:15pm, 4 Mar 2023

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In January, Western papers clamoured to cover China’s first acknowledged demographic decline since 1961. In the space of two days, The New York Times, for example, published eight pieces on the news. Words such as “problem”, “alarm”, and “crisis” dominated the headlines.

It would be wrong to only fault Western commentators for the hysteria. Chinese social media was awash with concerns for future state pensions. Even stock markets moved. Shares exposed to Chinese infant products fell on news release.

However, none of the grand implications that commentators discussed has much to do with China’s total population. Rather, it is working-age population that matters. Thus, the closest thing resembling a turning point already occurred when China’s working-age population peaked in 2012.

Let us consider the three areas capturing the spotlight: pension finances, of interest to China’s domestic audience; geopolitics, the sticking point for the international audience; and the economy, to which everyone tunes in.

First, the fiscal implications. The popular reasoning goes like this: in a pay-as-you-go pension system, the state funds the pensions of current retirees with contributions from current workers. As China’s population declines, the funding pool will dwindle. There might not be much left for current and future workers when they retire.

This much does reflect the situation China finds itself in. However, it has nothing to do with an absolute decline in population. Suppose, for the sake of argument, that a random 10 per cent of the population disappeared. On average there would still be the same number of workers per pensioner.

Workers at an automotive factory in Qingdao, in China’s eastern Shandong province, on January 14. China’s working-age population has been falling since 2012. Photo: AFP

Instead, an ageing population is highly problematic for this system. If the next generation is smaller than the current one, then either the former must bear larger burdens of contribution, or the latter must accept lower benefits. Yet clearly, China has long faced such headwinds. The recent decline makes no difference.

A similar story plays out for the economy as a whole. In canonical growth models, three variables are the top dogs: capital, labour, and technology. Demography quite directly affects labour. Yet here again it is the working-age population that matters.

Those too young or, more saliently, too old generally do not work. In addition, many of the right age may choose not to work. Policies that encourage women to be fertile mothers at the expense of working, which Chinese authorities appear to entertain, are shooting themselves in the foot.

Here’s another thought experiment. Suppose the total population fell due to a sudden loss of senior citizens. The workforce would remain constant. In fact, this sorry event would be good for GDP per capita, since the total population has fallen while output stayed constant.

This simple example also shows the danger of the reverse. If the workforce grows more slowly than the total population (or declines more quickly), GDP per capita would fall, holding all else constant. Imagine a dwindling number of workers having to sustain a community whose size has not changed. There would be less produced for each member, unless the workers became individually more productive.

02:12

Working until 70: Ageing in northeast China signals looming pension crisis

China, along with a host of other ageing countries, already faces this reality. Consequently, improving living standards is a long race between capital and technological gains on the one hand, and a demographic drag on the other. Yet the continued rise in China’s GDP per capita in the past decade shows the former has the upper hand.

By this point, it should be evident that geopolitics is similarly not affected by demographic decline per se. Like the economy, the two other major dimensions of national power – technology and military – only depend on the sizes of specific populations.

There is one feature that makes geopolitics distinct: that relative, not absolute, power is what matters. Most of China’s richer rivals are also beset with declining working-age populations, counting Europe and Japan among them. This makes China’s demographic position less disadvantageous. Yet notably, the US has the benefit of young, fertile immigrants replenishing its ranks. Perhaps more importantly, China unwisely added the young demographic behemoth of India to its list of enemies.

People walk through a market in Bangalore, India, on October 23, 2022 Photo: AFP

However, with considerable room to grow on the quality front, China’s human capital can still make gains on that of Western powers. Indeed, both China and the Western alliance are being displaced by the rapidly growing sub-Saharan Africa, where three of 10 babies in the world are now born.

So China’s historic population decline is not the oft-portrayed harbinger of doom, although the reality may be not much better. Demographic challenges were plaguing China long before 2022. There is little the country’s policymakers can do about a demographic trajectory set in stone decades ago. Yet this also means that China has a long track record of doing fairly well despite these headwinds.

Population fall calls for restructuring of China economy now

When China first announced the decline of its working-age population in 2013, economists discussed whether it heralded the end of China’s “demographic dividend”, the demographic benefits to economic growth. Ten years on, China managed to double its GDP per capita in dollar terms.

This does not make those economists wrong – China would have done better still had its demographic challenges not existed. So when the inevitable news about China’s demographic decline broke, it ought not to have been seen as an inflection point in China’s current trajectory. Rather, it is another sign of China’s chronic demographic ills.

Deng Jing-Yuan is a consultant at the World Bank’s Office of the Chief Economist for the Middle East and North Africa. These are solely the author’s opinions and do not reflect the views of any affiliated organisations