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  • Geoff Donald

When China Shrinks

Last week, the Chinese government revealed that the China’s population grew by just 480,000 people in 2021. When this small number of new births is combined with China’s aging population, the world’s largest country is facing a significant demographic change including the very real possibility that China’s population could start shrinking as soon as this year.

The massive economic growth that China has obtained over the past thirty years has in part been help by a demographic dividend of a large working population with increasing worker productivity as it switched from a rural agrarian economy to an urban industrial society.

Yet due to both a shrinking and aging work force this demographic dividend may be ending. So how did China get here and what does it mean for China and for the rest of the world.

Basic Problem

The basic problem that China faces from a declining population is presented as an economic challenge, namely that a declining population could create a burden on China’s labour force and younger workers. In addition, as the Chinese population ages and lives longer, the Chinese government may have difficulties in paying for this older population as a smaller workforce will be required to support a larger group of non-workers.

So how did China end up here?

While some of China’s population change is due to government policy choices, the population change can also be traced to two major trends that have impacted all countries – Urbanization and Female Education.

As countries shift from agrarian based societies to a more urbanized one, the number of children born per mother has seen as decrease. China, which has gone from a country in which less than 20% of people lived in a city in 1980 to almost 64% in 2021 has been impact by this trend with its fertility rate dropping in half over the same period.

Research on the second major trend of female education has shown that the higher level of education a woman attains, the lower the number of children that she will have. This trend is consistent across cultures and countries around the world. In China, there is has been a huge increase in both the literacy and education rate of Chinese women over the past forty years. Women now attend post-secondary in greater numbers that Chinese men with the most recent number showing that 1.45 million women are pursuing post-secondary education.

While these global trends have certainly impacted China’s fertility rate, it was the Chinese government’s decision to impose a “One-Child” policy in 1980 that has had an overwhelming impact on China’s current demographic challenge. This policy was modified in 2016 to allow a second child and more recently to allow a third child but so far, the policy change has had no discernible effect.

As a result of the One Child policy and a preference of a male heir over a female one, China has unbalanced male-female ratio while the number of women of childbearing age has been falling by 3.6 million per year for the past five years. Other factors such as delayed marriage, prohibitive cost of living and childcare (or the lack thereof) and increased employment pressure are impacting the number of births in China as young adults are faced with a diverse set of options and challenges than previous generations.

More recently, the COVID-19 outbreak is having an impact on the number of marriages and births in China further lowering the number of children born.

Like every other country China face numerous challenges over the coming decades as it looks to keep growing and improving the quality of life for its citizens. Having a declining population however will make achieving this goal even more difficult. Long term trends such increased urbanization, improvement in education for women, an unbalanced male-female ratio, along with an ever-decreasing number of women of childbearing age are all contributing to a decrease the overall number of births.

Economic Impacts of a Demographic Decline

When a shrinking population is discussed by policy makers, the concerns raised are primarily economic ones especially related to growth, income, and changes to the labour market. While population growth is certainly a factor in a country’s overall economic growth, with a slowing or declining population, China will focus on increasing its overall productivity to drive economic growth and increase its citizens incomes.

According to the government, China’s work force is expected to drop by thirty-five million people over the five years. As companies compete for a small pool of available workers, wages in China are likely to continue to rise. Overall, wages in China have grown by 2.6X since 2010 and this wage growth will continue.

One area of concern for all levels of Chinese government is that with a smaller and older population there will be a drop in government taxation forcing the various levels to either raises existing taxes, introduce new taxes or to reduce existing services or infrastructure. For example, while a smaller population may need less schools, reducing the number of existing schools in a city or an area may result in young families leaving to access better services thus making the situation worse. For the rural areas of China, this is a particular concern.

In addition to reduced taxation and lower service levels, China’s government will be forced to invest in infrastructure and services designed to support its older population. These choices will put added pressure on all levels of the Chinese government.

Availablitity of Capital

One economic area that is often overlooked as part of the discussion around a declining population is the change in availability of capital. A basic assumption for economic growth is that a consumer consumption will rise, and that the availability of personal capital will rise along with it. We also know that as people get older, they stop working and earning morning and they begin to use their savings. This reduction in savings means that banks and other finance companies will have less funds available for lending thus reducing the amount of capital available.

An older population will also see a shift on what they spend their funds on. In other parts of the world, an aging population tends to spend less on transportation, food and buying new real estate and household products. There is an increase in travel for a brief period, but this drops off quicky after a few years of retirement while health care spending sees a sustained spending increase.

So, Chinese policy makers are facing a shift in buying habits, a reduction in spending, and a lack of capital accrual. This is a major, major economic challenge not just for China but also for the world.

In 2020, China became the world’stop source of outward foreign direct investment with $133 billion. If you are a country leader who is relying on Chinese investment and demand driving your economy for the next 30 years or a property developer who has built thousands of apartments under the assumption that Chinese buyers will purchase them, you may be in for a major surprise.

The economic impacts of a declining population include lower GDP growth, smaller work force, higher wages, a smaller tax base, higher spending on maintaining existing government services and infrastructure along with changes in the overall availability of capital. As other countries such as Japan go through a similar challenge, China will be watching to see what steps can be taken. However, the sheer size of China’s population and lower GDP per person relative to higher income countries means that financial costs to China will be significantly higher with a smaller financial base to work from.

Geopolitical Impact

Amid increasing tensions between China and the United States, this demographic change can also be viewed through a geopolitical lens.

Globally, China is most influential in economic and financial areas but with the era of high growth ending and slower growth in the future, China influence may weaken. From a purely economic standpoint, China’s share of the global GDP is 18.33% which means any slowdown in China will have an impact on the global economy.

From an investment standpoint, less available capital means that Chinese individuals, companies, state-owned enterprises, and governments will have less funds available to invest in other countries either directly or through programs such as China’s Belt and Road Initiative.

As was mentioned above less people will mean less individuals available for key industries such as manufacturing and agriculture. As China is a significant importer of food and food products, the lack of labour available and willing to do agriculture work will be a significant concern to Chinese leaders as they look to be self-sustainable for food.

Another area that a shrinking workforce will cause heartburn for Chinese leaders is the military. China’s military is the largest in the world with 2.8 million soldiers, sailors, and aviators. A standing army of this size will be difficult to maintain in the decades ahead with less potential recruits. The Chinese military recognized this challenge and has taken steps to expand its recruitment through measures such as lowering education, height, and eyesight requirements for new recruits and by launching a modernization program to develop a military system more focused on high-tech systems and less manpower.

While less economic influence and a smaller military would be welcome in many quarters, the question of what China would do if it felt its influence will weaken in the future needs to be answered. Will this future challenge make it more or less likely to conduct military operations against Taiwan or in the South China Sea? Will China look to setup its own international rules to cement its position, or will it continue to follow the existing international structure? Will China look to develop treaty allies in various parts of the world? How will China use its economic and soft power in this future? Will China feel threatened?

The geopolitical questions around a declining Chinese population are numerous, unanswerable but will need to be monitored going forward.

Impact on Chinese Society

While most of the discussion on a changing population is focused on economic or geopolitical issues, the social impact of declining population on China will be massive.

As we know a declining population means fewer young people, fewer young people mean less marriages and less children. Less children will mean less schools while less schools will drive away young families with children. As young families move to bigger cities where services are likely to be available, the average age of the place that they are leaving will go up. The place they leave will also have a smaller workforce making it harder for businesses to find staff locally. A town that has a smaller, older population with a shrinking workforce may be less attractive to do business.

A declining population also means that the demand for facilities such as sports centres, libraries, museums, cinemas, and restaurants will decline, so these facilities will be cut back. Meanwhile less people use public transportation, and less people are paying taxes means that the cost existing infrastructure will go up. And China has a lot of infrastructure to pay for.

The scariest scenario could play out in housing. China real estate companies have built hundreds of thousands of apartments under the belief that the economy will continue to grow and demand for housing will continue. But with a declining population there will be less demand for new houses, less demand for rental property and more homes unoccupied. This oversupply and drop in demand will inevitably lead to a drop in prices which will be a major problem for the Chinese economy, Chinese business, and Chinese leaders.

But what about the China’s seniors?

One side effect of a shrinking population due to low birth rates is that the rest of the population will get older. And China is about to experience a massive growth in the number of seniors in the country.

In 2018, the share of the Chinese population over the age of sixty was about one-fifth with projections suggesting that by 2050 this share will increase to almost 40%. Over the same period, China’s dependency ratio (the number of people below 15 and above 65 divided by the total working population) is expected to rise from 36.6% to 69.7%. So, there will be a lot more Chinese seniors and they will make up an increasing share of the population. This large group will drive a huge demand in goods and services that will help support their new needs and lifestyle.

Health care is one area that will see an increase in demand as the Chinese population gets older. Currently, 95% of all Chinese people are covered under the government health care plans which covers primary, specialty, hospital, and mental health care, as well as prescription drugs and traditional Chinese medicine. Since a re-organization of the China’s health care system in 2009, China government health expenditure has increased by more than 300%. A recent study suggests that health expenditure in China is projected to grow 8.4 percent annually, on average, between 2015 to 2035. Such high levels of growth in health care spending will put additional pressure a smaller workforce that will be needed to pay for it and on the Chinese government to balance its spending needs across various priorities.

Any change in a country’s population size will impact its society. While China has benefit from a growing population and a growing economy, China now must focus on managing not only the economic challenges of a declining population but also the short- and long-term impacts that such a decline will have on its society.


So, to sum up:

China population growth is slowing to a halt and soon China’s population will begin to shrink.

The impact of a declining population will have massive impacts economically and financially, socially and on geopolitics.

But can anything be done?

To asnwer this question, In the next post we will look at China’s potential options in face of this declining population.

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