China’s deepening demographic crisis calls for stronger, more coherent course of action from Beijing

Current measures like the three-child policy per couple are not enough to increase the country’s flagging fertility rate
China’s shrinking population is one of the biggest ‘grey rhinos’ – highly probable yet neglected threats – endangering the country’s future

Zhou Xin

Published: 11:00pm, 27 Feb 2023

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China is walking into a demographic crisis that is unprecedented in speed and scale. The country’s population started to shrink last year as the national birth rate fell to a record low, while the number of elderly continues to climb. That situation not only threatens to overburden the healthcare infrastructure and puts the pension system at risk, but it also poses a challenge to China’s economic ambitions.

The central government, however, has yet to respond with a coherent and effective strategy to meet this challenge.

Unlike the defunct one-child policy, which was forcefully implemented nationwide under a strict legal, institutional and administrative regime for more than three decades, efforts to boost China’s birth rate – certainly, a top priority for the country – have so far lacked an effective overall design. The state has stopped “punishing” births, but current measures like the three-child policy per couple are not enough to increase the country’s flagging fertility rate.

Providing incentives for China’s young couples to have children has mainly been undertaken by local governments. In tech hub Hangzhou, capital of eastern Zhejiang province, the municipal government has announced that it will help subsidise a couple’s third child with a one-off grant of 20,000 yuan (US$2,875), while their second child is entitled to a 5,000-yuan handout. In Harbin, capital of northeastern Heilongjiang province, where the population has rapidly declines, a couple’s third child would be entitled to a 1,000 yuan monthly subsidy for three years.

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But in general, those initiatives are piecemeal measures that have been implemented without any central guideline from Beijing. By comparison, the one-child-policy era held local officials directly responsible for failure to keep population growth in check. It may be time for Beijing to punish local officials who fail to arrest population decline.

Current incentives are also too small to make a difference. Hangzhou’s 20,000-yuan subsidy is among the highest in China, but it is a drop in the bucket when compared to the cost of raising a child. The expense involved for the child’s own room, for example, could easily amount to hundreds of thousands of yuan.

During the time when Beijing kept in check unwanted births, an “out-of-plan” child was often punished by a fine equivalent to a household’s two-year income, infamously known as the “social child-raising fee”. Adapting that idea to the present, the financial incentive for a second or third child should be increased to an amount equivalent to a household’s two-year income.

There are many obvious policy options. China’s personal income tax, for example, is collected on an individual basis, instead of per household, with a next-to-nothing tax deduction for kids.

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Under China’s current tax regime, a child is only entitled to 1,000 yuan of deduction from a couple’s taxable income. This tax credit is so tiny that many couples do not see it as something worth the trouble to claim. What China should do is implement a household-based income tax system as quickly as possible and raise the under-18 tax credit to a level on par with Hong Kong, which is HK$100,000 (US$12,739) per year per child.

China’s shrinking population is one of the biggest “grey rhinos” – highly probable yet neglected threats – endangering the country’s future. Beijing may have neglected this issue for far too long, but now it deserves the central government’s utmost attention and resources.

A decade ago, China’s family planning authority had hailed “reduced births by 400 million” as a great achievement. Just four years ago, China’s then-statistics chief publicly brushed aside concerns about population decline, saying there was no need to “overread” the situation. Today, the problem is too big to ignore and its chain reaction has started.

Chinese people’s delegates next month will gather in Beijing for the “two sessions” to discuss the country’s future. The demographic crisis should be on the priority list because nothing is more important than this issue over the long run.