China faces economic headwinds as it grapples with an aging — and shrinking — population

China’s
population
is
shrinking,
and
the
demographic
shift
will
ultimately
hurt
its
economy,
shrink
the
labor
force
and
put
pressure
on
fiscal
policy.

“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,”
Darren
Tay,
head
of
Asia
country
risk
at
BMI
Country
Risk
&
Industry
Analysis,
told
“Squawk
Box
Asia”
in
June,
referring
to
estimates
gathered
by
evaluating world
population
data released
by
the
United
Nations.

“The
fiscal
strain
as
a
result
of
ageing
is
immediate
and
concerning,”
the

Economist
Intelligence
Unit
has
warned.

“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.

Raising
the
retirement
age
is
“one
of
the
few
viable
options”
to
maintain
long-term
fiscal
balance,
the
EIU
said.

“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.

Birth
rates
are
falling
around
the
world
as
women
choose
to
have
children
later,
or
not
at
all.

Fertility
rates
have
halved
across
OECD
countries
—
some
of
the
world’s
richest
nations
—
falling
from
about
3.3
children
per
woman
in
1960
to
about
1.5
children
per
woman
in
2022,
according
to
the OECD,
or
Organisation
for
Economic
Co-operation
and
Development.

“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.

Fertility
rate
in
the
country
is
dropping
more
quickly
than
its
regional
peers
like
South
Korea
and
Japan,
Tianchen
Xu,
a
senior
economist
at
The
Economist
Intelligence
Unit
(EIU),
told
CNBC.

He
said
the
three
countries
are
disproportionately
impacted
by a
rapidly
aging
population, largely
due
to improved
standards
of
living, which have a
“very
strong
inverse
relationship
with
fertility
rates.”

China,
in
particular,
has
been
“growing
at
a
very
high
rate
for
nearly
three
decades.”
and
its
economic
expansion
has
been
“rapid
and
extended,”
he
added.

The
country’s welfare
system
has
also
“lagged”
and
fiscal
support
for
childbearing
is
“quite
low
by
international
comparison,”
according
to
Xu.

Surging
home
prices
are
not
helping.

“The
government
has
largely
been
incapable
of
managing
the
significant
rising
housing
costs,”
according
to
Xu,
who
pointed
out
that
as
housing
becomes
increasingly
costly,
people
may
find
it
difficult
to
purchase
homes
and
delay
starting
a
family.

The
rapid
economic
expansion
seen
in
recent
decades
in
developed
nations
has
brought
about
rising
income
levels
and
the
broadening
of
educational
and
career
opportunities
for
women.

These
improved
conditions
have
led
to
a
greater
opportunity
cost
for
having
children,
Xu
said.

“In
more
developed
societies,
the
tendency
is
that
parents
face
a
much
higher
cost
of
raising
children,
and
that
tends
to
be
a
deterrent
to
having
[them],”
said
BMI’s
Tay.

“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,”
she
said.

The
work
culture
in
Asia
can
also play
a
part.

“Among
the
Asian
countries,
there’s
the
entrenched
mindset
of
working
long
hours,”
said
Xu,
which
is
“particularly
an
issue
in
China,
South
Korea…
[and]
other
parts
of
East
and
Southeast
Asia.”

“These
countries
are
where
the
aggregate
working
hours
are
the
longest
in
the
world,”
and
as
a
result,
workers
have
less
time
to
build
a
family,
Xu
told
CNBC.

A
decline
in
fertility
rate
puts
pressure
on
the
economy
and the
society
at
large as
the
working
population
shrinks.

“A
country’s
birth
rates
will
translate
into
its
working
age
population
growth,
some
two
decades
down
the
road,”
said
Tay
from
Maybank..

Additionally,
falling
fertility
rates
can
impact
the
ratio
of
elderly
folks
who
need
support
from
younger
generations,
which
can
put
“excessive
burdens
on
a
country’s
health
care
and
pension
systems,”
Maybank’s
Tay
told
CNBC.

Ultimately,
the burden
on
younger generations
will
grow
as
they
need
to
care
not
only
for
their
own
children,
but
for
their
elderly
parents
as
well.

This
demographic
shift
in
parts
of
Asia
is
a
structural
issue
that
will
require
“determined
and
holistic
government
effort,”
on
both
fiscal
and
monetary
policy,
she
said.

In
China,
policymakers
have
been
putting
a
big
emphasis
on
“productivity
growth,”
Xu
told
CNBC.

“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.”

The
country
has
invested
heavily
into
shifting
to
digital
solutions
and
developing
technologies
such
automation
and
advanced
chips,
said
Xu,
with
the
goal
of
making
traditional
industries
more
efficient,
and
overall,
improving
productivity.

Looking
ahead,
Chinese
policymakers
are
encouraged
to
do
more
about
the
labor
environment.
“That
probably
entails
tighter
enforcement
of
the
labor
law
and
promoting
work-life
balance,”
said
Xu.

Economists
also
agree
that
Chinese
policymakers
should
also
work
to
raise
the
retirement
age
in
the
country,
create
more
aggressive
tax
rebates
for
costs
associated
with
child-rearing,
and
step-up
its
efforts
in
constructing
affordable
housing
in
the
country.

Despite
the
slowdown
in
growth
expected
in
China
due
to
its
demographics
issue,
the
country’s
GDP
has
grown
an
average
of
9%
per
year
since
1978,
according
to
the World
Bank.

Ultimately,
“the
fact
remains
that
growth
of
even
around
3%
would
not
be,
by
any
stretch
of
the
imagination,
a
disaster
for
the
Chinese
economy,”
Tay
from
BMI
told
CNBC.

“If
they
would
continue
to
grow
at
that
pace,
which
probably
would
be
more
sustainable,
the
average
Chinese
citizen
would
be
in
real
terms,
better
off
in
income
by
13%
by
2033,”
he
added.
“So
living
standards
would
still
continue
to
rise.”