• Geoff Donald

When China Shrinks - Part Two


In part one of this post, we looked at the various impacts that declining population may have on China. These impacts can be geopolitical, social, or economic but how China chooses to respond and what actions they can take to mitigate this decline is what this second post will look at. In addition, we will also explore what benefits if any there may be from a declining population.


While the concept of a declining population has been discussed for several years, the general assumption is that the decline would start in the mid 2030’s. The recent demographics statistics released by the Chinese government shows that it will start much sooner– possibly even as soon as 2023.


So, what can be done about a declining population?

Without sounding flippant the best thing to do to stop a declining population is to find ways of increasing the number of people in China. The two methods that are most obvious are A.) Encourage Chinese parents to have more children and, B.) Immigration. Let’s look at each option in turn.


Encourage parents to have more children

It obvious that the best way to increase China population is for Chinese parents to have more children. The Chinese government has chosen this option and has made some changes such as the elimination of the “One Child” policy and the state encouragement for parents to have two or more children. While they had no doubt expect to see a sustained increase of the number of babies born in China from these changes, the overall number of children born, and China’s birth rate continue to decrease.


While it appears that simply encouraging people to have more children does not appear to work, other countries around the world have tried various methods to raise their birth-rates. Government support for increasing birth rates is focused on either financial support through paying out cash grants to parents or tax credits or by allowing employment flexibility through parental leave and childcare programs. The rationale behind these programs is to help lower the costs of having a child for parents and to minimize the disruption to the parents’ careers.


While some countries (Estonia, Germany, and Czech Republic) have had some success in reversing their birth-rates, countries such as South Korea, Japan, Singapore, and many more have continued to see a decrease in their national birth rates.




Immigration

So, if countries cannot increase their population by having more children, then the next option in using immigration to increase their national population. Canada, Australia, the United Kingdom, and the United States are all countries that are using immigration to increase their population while their birth rates drop.


But can China use immigration to increase its population?


Maybe but that would be a massive change to its current system because China has a negative net migration rate – meaning more Chinese people leave China that other people move to China. How many? Well, China has approximately 10.7 million citizens living overseas with the World Bank most recent data showing that 1.7 million Chinese immigrated out of China in 2017.


Traditionally, China has focused on encouraging overseas Chinese to move back to China rather than focusing on immigration from other countries. With a large labour surplus that had to be absorbed, China has focused instead on attracting high skilled individuals rather than lower skilled workers. As result of these focuses, the United Nations estimates that there approximately 1 million migrants in all of China (This number includes people born in Hong Kong and Macau who have move to the Chinese mainland). At just 0.07%, China has the fewest share of migrants of any country in the world.


It should be noted that it is very difficult find any official statistics on immigration into China. The most recent information available on the number of permanent residency cards issues by China is from 2016 when only 1,576 green cards, or permanent residencies, to foreigners. When these 1,576 green cards are compared to 1.18 million cards issued by the US during the same year the difference of the use of immigration between each country is stark.


For those limited foreigners that move to China, there is a limited chance of becoming as Chinese citizen without marriage While obtaining citizenship without a relative who is an existing Chinese citizen the process is described as “possible but extremely difficult”. In fact, China is considered one of the four most difficult places in the world to obtain citizenship due to a combination of long residency periods and unclear regulations for obtaining a Chinese citizenship. Since 1947 and the founding of the People’s Republic of China, only a few hundred foreigners have been granted citizenship.


The lack of a history of immigration and the current procedural barriers means that the Chinese government is unlikely to use mass immigration as a tool for reversing their population decline.


Other steps

If growing if China is unable to grow its population by either raising the birth rate of its existing citizens or by allowing larger scale immigration, what will it do?


So far to protect its economy from a declining population, China is taking steps to improve its labour productivity. According to the World Bank, China’s current total productivity is around half the average level of countries that are members of the Organization for Economic Cooperation and Development. In March 2021 as part of its 14th fiver year plan, China has set the goal of achieving productivity growth higher than the overall economic growth during the period of 2021-2025. Its aim to achieve this goal through improvements in the education system and innovation.


According to the plan, the average number of years spent in school for Chinese students will increase from 10.8 to 11.3 years with much of this expected growth coming in rural areas which have lagged the large coastal cities on high school attendance and graduation.

The Chinese government has set the goal to become a leading innovative country by 2035 with a focus on core technologies such as semiconductors, artificial intelligence, electric vehicles, wind and solar power, nuclear power, robotics, and other forms of advanced manufacturing. To help reach these goals, the Chine government is planning on increasing research and development spending by 7% per year from 2021 to 2025. In terms of total R&D spending, China is currently second only to the United States while the country has 43% of the world unicorns or start up companies valued at over $1 billion dollars.



Shrinking workforce

One challenge that China is already facing is a shrinking workforce. Over the next 5 years, more than 40 million people are expected to retire with only 5 million people expected to join the workforce. This means a net loss of 35 million workers.


One step that has been examined to multiple times to slow down the shrinking of China’s workforce is raising the retirement age for Chinese workers. Currently, China’s average retirement age is 54 years old which is among the lowest in the world. But raising this age is politically and socially difficult. While the 14th five-year plan does not explicitly mention raising the age of retirement, the plan uses words such as “flexible implementation” and “small steps” when discussing the issue.


Yet attempts in the past to raise the retirement age have met with pushback by Chinese workers who may not want to work for longer. Another factor that government officials must consider is that many grandparents take on the role of child-care during their retirement periods. If they are working longer, then less childcare would be available, and parents might be even less likely to have children thus making the issue of a declining population even worse.


Lastly, China has the largest public-pension system in the world with approximately 1 billion adult participants. As the number of retirees grows and a smaller portion of workers will be required to pay into the pension system, the pension system will become an increasing risk to the Chinese government. As it is, the country main pension fund may run out of money by 2035. While the Chinese government will not allow the pension system to collapse, future retirees may find lower financial support than they were originally expecting.




Benefits of a declining population?

Focus of this and the previous post is on the potential impacts of China’s declining population with most of the impacts seemingly being negative but are there any benefits to a smaller population? We have identified four areas where a smaller population could be a benefit:

1. A smaller population should mean less competition for resources. This means the strain on China’s water supplies, agricultural lands, and other natural resources may diminish with a smaller population. As competition over resources often leads to conflicts with neighbouring states, less competition should lead to less potential conflicts and more overall regional stability.


2. A smaller population should better for the environment. With China being the largest carbon emitting country in the world and carbon emission being the leading cause of climate change, the size of China’s population has a global impact. A smaller population should mean less overall carbon emissions which is benefit to the world.


3. A third benefit of a declining population is the increase the economic opportunities for minority groups in China. In addition, a smaller population and workforce will likely result in higher wages for workers especially low-skilled labourers.


4. Finally, a smaller population would mean reducing the need for infrastructure and housing. Funds currently used to build new infrastructure could be repurposed to areas such as healthcare, education, and technology investment. The challenge here is getting the timing of when to reduce infrastructure correct and the need to maintain existing infrastructure on a smaller population base.


While there are some potential benefits of having a country having smaller population, these benefits are less defined and, except for lower carbon emissions, are unlikely to balance out the negative impacts that a declining population brings.


Conclusion

As China face a demographic slowdown and potential decline, its public policy options for reversing this demographic shift are limited by global trends and its own structure. While China will no doubt increase its labour productivity to help offset some of the economic loss due to an aging population and workforce, the added costs of an aging population and the sheer size of additional retirees will put added financial and social pressure on the Chinese government. While a smaller population can result in some benefits, these benefits will not be large enough to offset the negative impacts of a small Chinese population.







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