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China’s demographic time bomb could hamper their ambition to become Global Super Power

Historically, as societies become richer, birth rates decline, and Communist party officials are quick to draw parallels with the likes of Japan, South Korea, Denmark and Sweden, which have managed sharp falls in their own rates. It is true that demographics are not destiny – Japan has achieved modest growth with a falling working age population and its per capita growth rate in recent years has been higher than that of the US.

Currently, China’s birth rate rests below the 2.1 replacement rate at 1.7 births per woman, and the population is projected to peak around 2030-2031. A diminishing pool of working-aged individuals implies a rise in wages for Chinese laborers, which would make it more costly to produce today’s level of output with tomorrow's workers. China’s economic growth is likely to drop to 2–3 % growth each year by 2030 as the nation grapples with declining birth rates and an aging population. 

According to various official estimates, China’s population will peak at between 1.44 billion and 1.46 billion in 2030 before entering a long period of decline. Some expect the population to fall to less than 800 million by 2100. The population of over-65s is expected to reach 300 million by 2025, accounting for about 20 per cent of the total, significantly up from 176 million at the end of 2019, about 12.6 per cent of the total. Meanwhile, the country’s labour force, people aged 16 to 59, has continued to shrink to 896 million in 2019, the eighth year in a row, and is projected to decline to 830 million by 2030.

China’s problems are largely self-inflicted – a legacy of the one-child policy that was brutally enforced until 2015. The policy spawned a vast, corrupt and zealous bureaucracy, which ruthlessly imposed the law, often through forced abortion and sterilisation.

One impact is a skewed sex ratio because of a traditional preference for boys over girls. Sex-selective abortion was widespread, and by one estimate there are up to 36 million more men than women. The impact of that today is less women of child-bearing age, and the widespread trafficking of brides from poorer neighbouring countries to China.

Other trend is the number of marriages in China has halved over the last 7 years, which indicates extremely low birth rates ahead. People are getting married later, and divorce rates are soaring. In the short term Covid-19 and the uncertainly resulting from China’s zero-Covid strategy is expected to further dampen marriage and fertility rates.

Unlike other countries, the cost of raising children, from education and housing to childcare is another disincentive to have children and more and more young Chinese are going childless as a lifestyle choice. Smaller households are becoming the norm.

The ratio of pensioners to workers will rise to 25 % in 2030, is expected to exceed 43 % in 2050, and is happening much faster compared with other countries. Experts have warned that the declining workforce will hit savings and investment and that China’s welfare system will be unable to cope.

China’s policy options—family planning and encouraging movement to other urban areas—to slow its demographic decline are costly, time-consuming, or politically unfavorable in the short run. Encouraging families to have more children through policymaking or propaganda is inefficient as an immediate solution to China’s demographic decline.

By most measures China’s population challenges are the most urgent and severe in the world.

China is on the cusp of a large demographic shift—a shrinking population of working-age adults coupled with an increasing population of retirees—and its economic growth prospects will be negatively impacted. Based on political, social, and technological circumstances, China’s limited ability to react to this demographic shift will likely lead to slower growth outcomes in the next twenty to thirty years and impact its ability to compete on the world stage with USA. However leadership of China was following these global trends and argues that they would innovate its way through the challenge of fewer young workers. In the process of digitisation of the Chinese economy, the country will find more new growth points and driving forces other than the demographic dividend. In the industrial, heartland of southern China, companies are accelerating the installations of industrial robots because they cannot get enough young workers and labour costs are soaring. The authorities talk of moving from an economic model reliant on plentiful cheap labour to one driven by innovation.

China’s demographic time bomb is ticking faster – by most measures China’s population challenges are the most urgent and severe in the world. The tremendous pressure on the country’s overwhelmed hospitals and underfunded pension system is already beginning to tell.

The economics of demography are complicated; a plunging birth rate does not predestine economic strain. Perhaps China will innovate its way through as the CCP claims. The success of Xi Jinping’s much vaunted Chinese dream of rejuvenation and prosperity may depend on that belief.

Economic prosperity is the most effective contraceptive for population growth. Countries moving through the Demographic Transition Model of economic growth—how a country’s economic development is linked to its population—often see a sharp decline in birth rates as they become richer. This patterned population decline is ideally coupled with an increase in innovation and total factor productivity (TFP), or output produced with a certain set of inputs, to offset the shrinking workforce with heightened per-worker productivity. Japan and South Korea experienced rapid economic growth along this pattern and achieved a high-income status before their fertility dropped sharply. Unfortunately for China, each of these economic powers has yet to employ a successful solution: no precedent exists to reverse the demographic challenge. For China, the lack of a clear solution for its soon-to-be-shrinking population will likely be met with slower growth rates: its population is “growing old before it grows rich.”

CA Harshad Shah, Mumbai

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