China's growth is doomed to decline, dragged down by demographic challenges unfolding during a pivotal moment in its economic development.
One And Done
When China implemented its one-child policy in 1980, the Communist Party was concerned that rapid population growth would interfere with savings and investment and the CCP’s plans to rapidly increase income per capita. China’s population had nearly doubled since the CCP came to power three decades earlier. Yet fertility had already substantially declined, from nearly six children per woman in 1950 to well under three by 1980. The one-child policy continued but did not immediately accelerate the fertility decline. With exceptions — for rural farm families and couples who were themselves only children, for example — it was a one-child “plus” policy, and China’s fertility remained above 2.5 children per woman for a decade.
Starting in 1990, however, the policy was more strongly enforced and followed. In that year, the crude birth rate fell by 20%, initiating a sharp decline. By the late 1990s, fertility had fallen to just over 1.5 children per woman, as “one and done” increasingly became the norm. According to estimates from the United Nations, China’s fertility was 1.16 in 2021 — finally achieving the “one child” goal after 40 years.
While there is considerable debate over the accuracy of China’s official demographic data, there is no doubt about what the most recent Chinese statements are showing. According to data just released by China’s National Bureau of Statistics, China’s population fell by 850,000 in 2022, the first year that deaths exceeded births since the famines of the Great Leap Forward in the 1960s.
This drop in births is unlike anything seen before. In the 1960s, China’s birth rate reached above 40 births per year per 1,000 people; in the 1980s it hovered around 20. But the recent decline has brought the birth rate to just 6.77. A birth rate that low will compound China’s trouble for decades, as each year fewer women are born who will be around to have children 20 or 30 years later.
This ultra-low fertility, however, is not simply the result of demographic policy. In fact, the government has been frantically trying to increase fertility in recent years. The one-child policy ended in 2016. More and more opportunities and incentives for women to have larger families have been offered. Yet China’s young women have spurned these opportunities. The crude birth rate has fallen by 40% since 2016.
“This drop in births is unlike anything seen before.”
Ultra-low fertility is common across East Asia. It is 1.3 children per woman in Japan, 0.88 in South Korea, 1 in Singapore and 1.1 in Taiwan, according to the U.N.’s estimates for 2022. Fertility has fallen to these levels not because of government policies, but because of widespread changes in Asian societies, the foremost of which are changes in the situation of women.
On the one hand, women are encouraged to become educated and seek full-time work and careers, unlike in the past. On the other hand, if married, women are still generally expected to take full responsibility for raising children and maintaining a household in societies where few families have the resources to hire household help. Moreover, even if women desire more children, the costs are steep — property is expensive and after decades of declining fertility, few residences with more than two bedrooms have been constructed, making them rare and costly.
Educating children in ultra-competitive Asian societies requires extensive efforts — and while China recently outlawed paid tutoring services, deeming them a cost of child-rearing that discourages women from having more children, the result is simply to put even more of the burden of educating and tutoring children outside of school on mothers. Marriage is thus very unattractive for many young women.
The data makes this clear. First-time marriage registrations in 2022 were just 11.6 million, falling below 12 million for the first time since 1985, and down more than half over the last decade. And those who do wed are getting married at older ages: almost half of newlyweds were 30 or older. As older brides have fewer children, that too bodes ill for future population growth. While the low 2022 number might reflect the decline in social contact during the pandemic, the trend was well underway before COVID struck: From 2013 to 2019, the number of Chinese getting married for the first time fell by 41%.
Shrinking, Shrinking …
China’s efforts to increase fertility have so far been deeply unsuccessful. This should not be surprising — if ultra-low fertility is not the product of official policy, changes in that policy are not likely to have much effect on it.
Yet the most commonly cited future projection for China’s fertility, the “medium variant” projection produced by the U.N., assumes those policies will work. The projection assumes that fertility has already risen to 1.19 this year, will be back to 1.3 in 10 years, be up to 1.4 by mid-century, and almost 1.5 by the century’s end. Those figures are certainly an optimistic view; no East Asian society has yet seen that kind of sustained rebound in fertility.
A more realistic outlook can be found in the alternative “constant fertility” projection, also from the U.N. This simply expects that fertility reached 1.18 in 2022 and will then remain at that level for the rest of the century. The U.N. also provides a “low variant” estimate, which assumes that China’s fertility will fall further to 0.98 by 2026 and then to 0.80 in 2033 before slowly recovering to 0.98 by the end of the century. That seems perhaps too pessimistic, though not unreasonable, given that South Korea reached a fertility level of 0.81 in 2021, according to some estimates.
While much attention was given to 2022 being the first year that China’s total population fell, what really matters for the economy is not China’s total population, but the age structure of that population. Specifically, how much of China’s population will be working age? How many will be young workers aged 20-40, whose productivity generally rises rapidly with experience, as opposed to workers over 40, whose productivity has generally plateaued? And how many seniors (age 65+) will the working-age population have to support?
Though no longer growing, China’s total population will not abruptly decline. The fall in population last year was only 0.06%. From 1.4 billion today, China’s population will only fall to 1.3 billion by 2050. Yet total population figures are misleading; the composition of the population, particularly its age structure, is changing far more rapidly.
“China’s demography has set it on a course for disaster that will be difficult and perhaps impossible to avoid.”
After tripling from 330 million in 1950 to almost 1 billion in 2015, China’s working-age population (those who are 15-64 years old) peaked and began to fall. According to U.N. projections, the decline in this age group is projected to be rapid, falling by nearly a quarter by 2050. The decline is even more drastic for individuals in their prime working years, age 15-49; China’s population in this age group likely peaked around 2010 and is projected, assuming fertility remains at current levels, to decline by almost 40% from that peak by 2050.
That is worth repeating: China’s prime working-age population is set to fall by nearly 40% from its 2010 level in the next 30 years.
This is true of both the U.N.’s “constant fertility” and “medium variant” projections. Even under the UN’s “high fertility” projection, which has Chinese fertility nearly doubling to 1.9 by 2050, China’s prime working-age population would fall by 33% from 2010 to 2050. In other words, a massive decline in the prime working-age population in the next quarter century is inevitable, because almost everyone who will be in the labor force in 2050 has already been born. China’s labor force to 2050 is shrinking due to the rapid fall in births that has occurred from 1990 to 2020; any conceivable fertility increase in the coming decades will make little difference until the second half of this century.
Youngsters — aged 15-24 — generally boost productivity by being more educated and trainable, replacing older workers with leading-edge skills. In 1980, when China was about to begin its economic boom, this age group was much larger than older workers, outnumbering those aged 50-64 two to one. They created a wave of rising productivity that helped push China to rapid growth.
As of 2020, the numbers in those age groups have reversed almost exactly, with around double the number of older workers as young ones. By 2050, it will be triple: a heavy drag on further productivity growth. This is a demographic double-whammy: a massive drop in the working-age population and a labor force that is far older than that which characterized China’s boom.
While it is awkward to speculate on what will happen beyond 2050 — the government and economy may be quite different than they are today — a constant fertility rate of about 1.2 children per family will produce an accelerating labor force decline. China’s prime-age labor force, those aged 15-49, will decline from roughly 700 million today to less than 300 million by 2070 and well under 200 million by 2100 — about the same number as the United States today.
… And Aging, Aging
While China’s labor force is quickly shrinking, its overall population size will be maintained because improved life expectancies will produce a huge increase in the number of seniors. The population over 65 years of age, which was just 100 million in 2005, will have doubled to over 200 million by 2025, and then double again to 400 million by 2050. At that point, there will be fewer than two people of working age (15-64) for every senior over 65. The typical 50-year-old will then be taking care of a 70- or 80-year-old parent, trying to work full-time and still be responsible for a 20-year-old student as their child. The strains on family life will be immense.
Again, it is speculative to look past 2050, but the demographic models project that the number of seniors over 65 in China will surpass the working-age population (15-64) around 2080. It is difficult to conceive of what a population with over half its adults over age 65 will look like and how it will function, what portion of national income will have to be devoted to pension and health care. Yet the data is not entirely speculative, as every person who will be 65+ in 2080 has already been born. So we have a very precise count of the number of people who will be seniors in 2080. The only part that is uncertain is how fast the labor force will decline.
At present, China’s pension system is primitive. Families have invested in real estate in the belief that property prices will continue to rise and provide the best insurance for the future. Yet that belief too is likely to be overturned by demography. Housing prices are sensitive to the rate of family formation. People generally seek to own their own home when they marry and seek a larger one when their family grows with children. A country where fewer and fewer people are marrying and having few children (most families stop at one child), is a country without a growing demand for housing.
“What really matters for the economy is not China’s total population, but the age structure of that population.”
That trend will be amplified as the number of young people in China declines. A good forward predictor of the demand for housing is the population aged 15-24; this is the prime age group that, in the following decade, is likely to marry and have their first child. From 1985 to 2010, that age group in China fluctuated but remained at about 230 million, producing a steady demand for housing and encouraging localities and development firms to devote more land and money to new housing projects, many on an enormous scale.
Yet from 2010 to 2020, the sharp decline in fertility that started in the 1990s affected the 15-24 age group, which was 26% smaller in 2021 than a decade earlier. This suggests that the current housing slump in China is not merely a temporary market fluctuation, but a reflection of a steady long-term downtown in housing demand.
Looking ahead, the decline in the 15-24 age group will be fierce. It is difficult to imagine any other outcome than an enormous crash in housing values, given that China has already built its residential capacity well above current needs. While this projection assumes constant fertility, any increases in fertility, although welcome, would be irrelevant in the short term, as they would not increase the key 25-35 age group — new home buyers — for at least 25 years.
Even under the U.N.’s “medium variant” projection, which assumes that Chinese fertility increases from 1.18 to 1.4 (higher than Japan today) over the next three decades, the 15-24 age group still declines by 40% by 2050. It is not too much to say that the one-child policy has served as a bullet to the head for the future of housing demand; that is a harsh reality for an economy that has invested so much in housing, and where household savings are so dependent on home values.
The Productivity Problem
The answer to China’s demographic problem is achieving higher productivity. Yet here both the arithmetic and the economics are challenging.
First, in China today, for every 100 people aged 15-64, there are only 14 seniors (65+) who need pension and medical support. By 2050, that burden will more than triple to 46 seniors per 100 workers. So simply in order to provide for seniors at the same penurious level as today, while allowing workers to retain the same amount of real income, productivity would have to be 28% higher. If China also wished to meet its ambitious goal of raising its GDP per capita to “developed country” levels by 2050 — roughly doubling it to a level equal to Portugal, for example — productivity would have to rise by 156% from 2020 to 2050, or 3.2% per year.
While that may seem small compared to China’s past productivity growth, it is a huge challenge for any major economy. Japan, Germany, France, the U.S. and the U.K. have all failed to produce productivity growth of 3% in any decade since the 1980s. From 2000 to 2020, productivity growth in these countries has averaged about 1%.
Moreover, China’s most recent performance has been considerably lower. According to the IMF, China’s annual productivity growth averaged just 0.6% between 2012 and 2017. The major motors of GDP growth that propelled China’s dynamic rise are not likely to show much strength in the future.
The first motor was urbanization — directing a huge and growing workforce from agriculture to factory work became the main driver of growth. Huge investment (domestic and international) in infrastructure and manufacturing made China the workshop of the world.
The second motor was education — as China’s workforce grew by 1% each year, new workers were far better trained and educated than the older workers they replaced (and outnumbered). The third and fourth motors were globalization and plentiful capital; as China’s economy grew, it sucked in raw materials and spewed out exports to a world that became addicted to goods produced with low-wage Chinese labor. The process was facilitated by falling trade barriers and easy international capital flows, which, along with healthy current account surpluses, directed huge amounts of money to China. The fifth motor was privatization, as China disinvested in state-owned enterprises and developed a fast-growing and far more productive sector of privately owned enterprises.
“Neither increased education nor increased urbanization will have anywhere near the impact going forward that they had in the last three decades.”
All of these factors are now stalling. While there is still some scope for better technical training of rural workers, and a reform of the restrictive hukou (urban resident permit) system could increase permanent migration to the cities, neither increased education nor increased urbanization will have anywhere near the impact going forward that they had in the last three decades.
In fact, China’s college graduates today are having difficulty finding employment, while China’s major cities are resisting any increase in the crowds of migrants already seeking temporary work and residence. Globalization has been thrown into reverse, with many restrictions on China’s technological imports and a variety of its exports already in place. In addition, the experience of the pandemic and China’s arbitrary response — from massive lockdowns to sudden opening — are prompting international firms to diversify their supply chains and new investments away from a place that seems far less predictable and reliable than a decade ago.
The result is that China’s balance of payments, which yielded a surplus of 4-10% of GDP from 2004 to 2010, has provided a diminishing surplus of under 2% since 2016. The IMF predicts a further decline to just 0.5% of GDP by 2027.
Of course, China’s leaders are aware of these issues and are going all out to make China a leader in what they hope will be tomorrow’s most profitable technologies: electric vehicles, solar power, artificial intelligence, quantum computing, biotechnology, robotics, aerospace and materials science. Yet China is up against substantial obstacles. To date, it has been unable to manufacture the most advanced microchips and is now under restrictions on importing them from the U.S. or U.S. allies. Without advanced semiconductors, which are at the heart of all computing and high-tech manufacturing, China’s ambitions to be a world leader in even more advanced fields of technology will be sharply constrained.
Moreover, despite periodic announcements of startling advances, China’s scientific establishment is already suspect: Many of the published research papers from China are repetitive or marred by plagiarism. In addition, the increasingly strict control that Xi Jinping’s government is placing on academic expression and the independence of firms and entrepreneurs (as exemplified by the pressures placed on Alibaba founder Jack Ma) are raising doubts about whether China will be hospitable to innovative tech firms. Tighter CCP control also may lead some of China’s best and brightest to move abroad, while discouraging overseas Chinese from moving back.
This leaves China deeply caught in the “middle-income trap.” That is, China began its rise as a global economic power by becoming the dominant low-wage manufacturing center for the world. Those days are over. As wages in China have risen to middle-income country levels, low-wage manufacturing has fled to developing countries with far lower wages. There are now almost two billion workers in South and Southeast Asia working for lower wages than China’s one billion workers.
With low-wage manufacturing fleeing, major infrastructural investments no longer so attractive or profitable, and an older, shrinking labor force, China is placing all its bets on high-tech and innovative industries to underwrite its future. Competing in high-tech with the already advanced Asian economies of Japan, South Korea, Singapore and Taiwan, not to mention the newly reenergized U.S. and European countries, will be difficult.
“China’s labor force contraction will be sooner and much sharper than Japan’s.”
Even if China succeeds in that, advances in software, social media, communications, video gaming, cloud computing and e-commerce in the U.S. have shown that many high-tech firms may generate huge returns for investors and their executives but provide relatively few jobs. Digital products and highly automated factories actually drive most workers into the poorly paid and less productive service sector. A few leading-edge successes in China are not going to replace the vast low-wage manufacturing sector as a machine for productivity, job and wage increases, and are not likely to raise the living standards of what will still be a population of 1.3 billion in 2050.
Many look at Japan, which has had low fertility for decades, yet enjoyed a stable or even slightly rising standard of living, and conclude that China will be fine even if fertility remains low. Yet this comparison is not apt. Japan’s fertility decline was early but slow. From 1970 to 2020, it only fell from 2.1 to 1.3 births per woman. In China, during the same period, fertility plummeted from 6.1 to 1.3.
China’s fertility decline has been far larger and more rapid than that in Japan. In Japan, the 25-64 age group has only fallen by 13% in the last 17 years, and will now be stable for the next 10 years. The really sharp and significant decline in Japan’s labor force will not begin until after 2030.
So yes, Japan has more old people compared to other countries, which has raised government debt; but that has been manageable for a wealthy country where interest rates were 0-1% for decades. And Japan has a shortage of young people (the 15-24 age group is down almost 50% since its early 1990s peak), so lots of schools are being converted to elders’ recreation centers, rural villages are emptying out with no children or young people, and property prices never recovered from the 1980s collapse.
But the real economic hit from changing demographics really hasn’t occurred yet in Japan, and won’t for almost another decade. China’s labor force contraction will be sooner and much sharper than Japan’s.
The Price To Pay
China’s demography has set it on a course for disaster that will be difficult and perhaps impossible to avoid. Whether there is a sudden crash, as perceptions of China as a growth machine are recalibrated to new realities, or a slow, drawn-out stagnation, hundreds of millions of Chinese will see their aspirations dwindle as it becomes apparent that Xi Jinping and the Communist Party are unable to deliver on their promises of the “Chinese Dream” of an ever-more prosperous China.
Japan has shown it is possible to maintain, or even very slightly increase, income per capita in an aging society, but conditions there are quite different. In Japan, the very well-educated and productive large cohort of the 1960s generation is still in the labor force, offsetting the effects of a decline in the youth population. Despite competition from Korea and Taiwan, Japan has managed to maintain much of the competitiveness in high-tech industries (especially automobiles, robotics, machine tools and construction equipment, video processing and entertainment) that it established from the 1960s to the 2000s.
In China, the large cohorts born in the 1960s and 1970s were the generation of well-disciplined but modestly educated low-wage workers who made low-wage manufacturing a success. The better educated and technically proficient workers born in the 1980s and later are precisely the cohorts that are much smaller and set to shrink even more dramatically in the coming years — at a time when China is still struggling to become competitive in the industries now dominated by wealthier countries, or to leapfrog them into the future.
When China’s economic difficulties become clear, there will be a price to pay. Across Europe, Latin America and the U.S., we have already seen how several decades of slowing gains in workers’ incomes as economies tilt toward finance, digital information, automation and service industries lead to angry populism. In the former Soviet Union and Eastern Europe, slowing economies in educated and middle-income but authoritarian nations has led to urban “color” revolutions seeking greater accountability. In Russia, which faces its own demographic disaster and slowing growth since 2014, Vladimir Putin sought to reclaim national glory by invading Ukraine.
In China, Xi Jinping’s efforts to clear the field of rivals and make himself the face of the Communist Party, responsible for all policy and the welfare of all Chinese, will leave him no place to hide when China’s growth model fails. Like Putin, he may feel it necessary to gamble on achieving a great national victory — in this case, taking on Taiwan. China will also likely accelerate its efforts to promote its trade and investments in Africa, Latin America and South Asia as ways to restart globalization in its favor and build up a network of customers and suppliers.
“It is difficult to conceive of what a population with over half its adults over age 65 will look like and how it will function.”
Yet as China has already learned, getting growth in these regions is not a simple matter of investment and construction; the leadership of foreign countries have their own priorities that often differ from China’s. These may include irresponsible financial policies that make it difficult for China to recoup its investments, as has already happened in Sri Lanka.
To be sure, the entire world, not just China, will have to adjust to a future without population growth. Most countries outside of Africa and South Asia will reach peak population in the near future, and global population looks likely to stabilize in the second half of this century. What we have never seen before is what happens when a country experiences such a sharp decline in fertility and labor force, certainly not at China’s middling stage of economic development, and not with such vast global ambitions. The most likely outcomes are a more aggressive China, with a domestic population wracked by angry populism, and, at some point, possibly a widespread popular uprising against China’s leadership.
Such instability is not something that Western nations should hope for. They would be wise to remember that most “color” revolutions, from the Philippines in 1986 to the revolutions in the Soviet Union and Eastern Europe to the Arab uprisings in Tunisia and Egypt, did not bring stable democracies. Instead, often corrupt, unstable or renewed authoritarian governments took control for years or decades.
The West might be wiser to try to work with China to help it improve its economy and manage its aging population. That is likely to be a more effective path to winning cooperation on vital issues of climate change and regional peace, and to help China’s citizenry pursue their own goals of greater freedom and security.
Given the demographic headwinds, there is little risk that China will overtake the economy of the U.S. or the EU. Western policy should thus seek to support China’s trade and economy, not throttle it. A China that achieves a “soft landing” from its demographic disaster will be a much more desirable partner in world affairs than an angry, authoritarian and unstable China unable to cope with such change.
BY JACK A. GOLDSTONE - NoemaMag
