Daily Management Review

China Is Dealing With A Declining And Ageing Population, Which Is Causing Economic Challenges


China Is Dealing With A Declining And Ageing Population, Which Is Causing Economic Challenges
China's population is declining, and this will eventually have a negative impact on the country's economy, labour force, and fiscal policy.
According to estimates derived from analysing UN-released world population data, "the working age population [in China] will fall so rapidly over the next decade, that the Chinese economy will need to deal with 1% drag in GDP growth per year for next 10 years," stated Darren Tay, head of Asia country risk at BMI Country Risk & Industry Analysis, in June.
The Economist Intelligence Unit has issued a warning, saying that "the fiscal strain as a result of ageing is immediate and concerning."
“Economic growth hinges on productivity, capital accumulation and labour inputs. The negative effect of an adverse demographic landscape will manifest primarily through a shrinking workforce,” according to the report published in January.
According to the EIU, raising the retirement age is "one of the few viable options" for preserving long-term budgetary balance.
“Our calculations suggest that if the retirement age is raised to 65 by 2035, the pension budget shortfall could be reduced by 20% and received net pension can be increased by 30%, suggesting relief of both government and household burden,” according to the report.
Globally, birth rates are declining as more women decide to postpone or forgo having children.
According to the Organisation for Economic Co-operation and Development (OECD), fertility rates have dropped by half in the OECD's member countries, which include some of the richest countries in the world. In 1960, there were around 3.3 children for every woman; by 2022, that number will be around 1.5.
“This is significantly below the ‘replacement level’ of 2.1 children per woman needed to keep population constant in the absence of migration,” according to the June report.
According to figures from the National Bureau of Statistics of China, China's population decreased by 2.08 million from the previous year to 1.409 billion in 2023, marking the country's second consecutive year of decline.
That surpasses the population decrease of almost 850,000 in 2022, the first year since the Great Famine in the early 1960s when deaths in the nation outpaced births.
The one-child policy that was implemented in the 1980s is to blame for this, according to Erica Tay, director of macro research at Maybank.
By 2050, China's population is predicted to reach 1.317 billion, and by 2100, it will have decreased by almost half, to 732 million.
The nation's fertility rate is declining faster than those of its neighbours in the area, such as South Korea and Japan. Senior economist Tianchen Xu of The Economist Intelligence Unit (EIU) stated.
According to him, the three nations are disproportionately affected by the fast ageing of their populations, partly as a result of rising living standards that have a "very strong inverse relationship with fertility rates."
In particular, China's economy has been "rapid and extended," he continued, and it has been "growing at a very high rate for nearly three decades."
According to Xu, the nation's welfare system has also "lagged" and the financial assistance provided for having children is "quite low by international comparison."
Rising real estate costs are not beneficial.
Xu said that when housing costs rise, people may find it difficult to buy homes and put off beginning a family. "The government has largely been incapable of managing the significant rising housing costs," Xu said.
The swift economic growth observed in industrialised countries throughout the past few decades has resulted in increased income levels and expanded educational and employment prospects for women.
According to Xu, having children now comes with a higher opportunity cost as a result of these better circumstances.
According to BMI's Tay, "parents in more developed societies tend to face a much higher cost of raising children, and that tends to be a deterrent to having [them]."
“The more developed an economy is, the more skills the actors in the economy have to have, and thus, the required investment in each [child] rises by that amount,” he said.
Asia's work culture may also be a factor.
Xu said that the habit of putting in long hours at work is "entrenched among the Asian countries" and that it is "particularly an issue in China, South Korea... [and] other parts of East and Southeast Asia."
According to Xu, "these countries have the longest aggregate working hours in the world," which means that employees have less time to start a family.
The economy and society as a whole are impacted by a declining fertility rate since fewer people are working.
“A country’s birth rates will translate into its working age population growth, some two decades down the road,” said Tay from Maybank..
Moreover, declining birth rates may affect the proportion of old people who are dependent on younger generations, placing "undue strain on a nation's health care and pension systems," according to Maybank's Tay.
In the end, younger generations will bear a greater burden since they will have to take care of their old parents in addition to their own children.
According to her, the fundamental problem of this demographic change in some regions of Asia would need for "determined and holistic government effort" in the areas of monetary and fiscal policy.
Policymakers in China have been emphasising "productivity growth," according to Xu.
“They have [seen] that there’s a very big decline in the labor contribution to GDP, [which] cannot be mitigated via any sort of policy intervention in the short term,” he said. “That’s why they have been focusing on their productivity growth.”
According to Xu, the nation has made significant investments in the development of sophisticated chips, automation, and digital solutions in an effort to boost production by increasing the efficiency of conventional sectors.
It is urged that Chinese officials take greater action on the working environment in the future. "It most likely means encouraging work-life balance and strengthening the labour laws," Xu stated.
Economists also concur that Chinese officials ought to endeavour to increase the nation's retirement age, implement more generous tax breaks for expenses related to raising children, and intensify their efforts in building reasonably priced homes.
According to the World Bank, China's GDP has increased by 9% year on average since 1978, despite the country's demographic problems which are predicted to cause development to slow down.
At the end of the day, Tay from BMI told CNBC, "the fact remains that growth of even around 3% would not be, by any stretch of the imagination, a disaster for the Chinese economy."
"By 2033, the average Chinese citizen would have a 13% increase in income if they kept growing at that rate, which is likely more sustainable," he said. "Therefore, living standards would keep rising."