China’s Shrinking Population No Imminent Threat Economy

China’s population fell in 2022 and will continue to do so throughout the 21st century, according to the United Nations Population Division’s 2022 Revision of World Population Prospects. The data shows a sharp fall in China’s fertility rate from 1.81 births per woman in 2017 to 1.16 in 2021.

This trend is based on data supplied by the Chinese government, indicating China’s belated acknowledgment that the country’s fertility rate is very low. The UN projects that China’s fertility will rise very slowly and evenly from its low point in 2021 to reach 1.48 births per woman by 2100. This seems an unlikely scenario based on the experience of fertility trends of Chinese populations in Hong Kong, Taiwan, and Singapore and, importantly, in China’s largest cities. Among these populations, fertility has fallen even further and remained low for many years.

When a country’s annual fertility rate falls rapidly to a very low level, it is often because women of younger childbearing age delay their first birth while women of older childbearing ages limit the number of children that they have. The age at which women have their first birth has been rising rapidly in China, but there is still scope for further rises as female education levels increase, employment opportunities for women expand and China urbanizes.

There is an emerging trend in some advanced countries — including Japan, South Korea, and Italy — that what was initially thought to be a delay of first births was the result of a higher proportion of women opting to have no children. This decision is influenced by the very high opportunity costs of having a baby in economies where employers discriminate against mothers — or potential mothers — and because social institutions provide little support for working mothers. This behavioral pattern is likely to occur in China as well.

A more reasonable scenario than the UN’s prediction is that fertility might remain very low in China for many years to come. China’s population is projected to fall by 658 million from 2022 to 2100. Over the same period, the percentage of the population aged 65 and over is projected to rise from 14 percent to 41 percent. Assuming age and gender labor force participation rates are constant at 2010 levels, the size of China’s labor force would fall from 796 million in 2022 to 348 million in 2100 — a fall of 56 percent.

While these changes will have major impacts on the economy of China, how these will manifest is unclear because there is no precedent of a population falling by such vast numbers.

Long-term population projections carry a high degree of uncertainty because governments take actions that change the demographic future. Because of this, only the short- to medium-term implications, roughly from 2022 to 2050, are considered here. China will try vigorously to change its projected demographic future, but substantial population decline by 2100 is inevitable.

In the short to medium term, 2020–40, China’s labor force will fall by only 8 percent assuming constant age and gender labor force participation rates. This is because the size of the labor force would increase at older ages while falling at younger ages.

There is also scope for older age participation rates to increase due to government policy — a potential offset to the projected fall in the labor force. Older people will be healthier and have an incentive to continue working as most have little or no pension and a limited number of children to support them. Older workers, however, are overwhelmingly low-skilled.

To continue its economic growth from a middle- to a high-income economy, China must shift from low-skill, labor-intensive production to higher value-added production based on advanced technologies. This approach has been successful in Japan, South Korea, and Taiwan and the transition is already well underway in China, which has almost half of the world’s industrial robots and is a manufacturer of electric vehicles, lithium-ion batteries, and photovoltaic solar panels.

A young, well-educated labor force helps to support this transition. The 2014 National Transfer Account for China shows the very unusual pattern that incomes are highest for those aged 25–34 and fall away very sharply as age increases. The mean income of a 30-year-old in 2014 was more than twice that of a 50-year-old.

High-productivity workers are young and well-educated. From 2020 to 2040, China’s highly productive young workers will age and increase labor productivity across the age range of the labor force. Each new generation entering the labor force will be better educated than its predecessors. This should ensure healthy economic growth in China over this period.

A challenge to this scenario is that the number of young workers aged 25–39 is projected to fall by 23 percent between 2020 and 2040 with little scope for increased participation rates among this age bracket. The challenges will multiply after 2040 as the number of young workers in this age group falls even more rapidly for a total fall of 54 percent from 2020 to 2060.

With present patterns of private and public consumption, population aging does not present the same challenges as it does in most advanced countries. Per capita consumption among older people in China is relatively low and is no higher than for adults at younger ages. This is because pension, health, and aged care systems are poorly developed and do not involve the high levels of expenditure found in Western countries and Japan.

In contrast with Western countries, per capita consumption for school-age children in China is much higher than for adults. In the short to medium term, fewer children imply reduced expenditure — an advantage to the economy.

While demographic trends may not pose a major problem for China’s economy in the next 20–30 years, on current settings, the negative impact is likely to be severe beyond 2050.

This article was originally published on the East Asia Forum.