China Is Growing Old Before It Becomes Rich: Does It Matter?

China’s Demographic Difficulties

In 2022, after six consecutive years of declining birth rates, China recorded its first annual population decline since the early 1960s. According to a forecast by the United Nations, China’s population is set to fall from 1.426 billion in 2022 to 1.313 billion in 2050 and drop below 800 million by 2100. The problem for China, though, isn’t simply a falling population but rather the worsening ratio of retirees to individuals of working age, which will increase the burden on income earners to support the rest of the population. Every estimate and forecast we found (see Figure 1) shows that China’s old-age dependency ratio will continue to rise in the coming decades.

The overall trajectory of China’s demographic shift is by no means unusual, as it has been following the path of other East Asian countries – Japan’s population began to decline in 2009 and South Korea’s in 2021. However, as a result of the one-child policy and rapid urbanization, China’s population growth has receded more quickly and at a much lower level of per capita wealth than almost any other country. Figure 2 plots the old-age dependency ratio of a handful of countries against their per-capita income. China does not have the highest dependency ratio, but it is distinctive in how quickly that ratio is rising relative to its income levels. As a consequence, China is quickly growing old before it becomes rich.

The Risks

Many observers have expressed concern over the long-term impact of China’s demographic trends given the country’s weak social safety net, particularly for rural residents since many of them do not have access to adequate healthcare or pensions. A declining population will also exacerbate issues in the housing sector as fewer people will need to buy homes. This decline in demand could lead to a long-term oversupply of housing in a market that’s already desperate for buyers. Some observers, such as James Liang, have hypothesized that a smaller, older population could worsen the country’s innovation capacity.

Given China’s central role in the global economy, structural challenges that could potentially slow long-term growth such as demographic trends merit close scrutiny. Even more importantly, perhaps, is assessing the government’s response to these issues and the policy tools at its disposal.

When looking beyond the headlines, there is a vigorous debate among scholars about how painful these adjustments will be. What emerges is a more complicated picture regarding the economic consequences of China’s demographic transition.

For example, Bert Hofman, previously chief representative for the World Bank in China who now heads the East Asian Institute at the National University of Singapore, argues that population decline by no means spells doom for China. If the government can effectively implement policy reforms to better prepare the economy for the aging population, China could still avoid a demographic crisis.

Others agree that population decline itself will not cause a crisis, but they are concerned that the broader structural challenges will be exceedingly difficult for China to manage. For example, Scott Rozelle (SCCEI, Stanford University, and partner with CSIS on Big Data China) has found that demographic patterns are more directly correlated with growth when the economy is highly dependent on low-end manufacturing and cheap wages. China has already shifted away from that model of development. The low level of education of much of the workforce and the structure of China’s economy, however, are far more concerning. Much of the rural population has only access to low-quality education, translating to millions of young people underqualified for skill-intensive jobs in high-tech industries that are needed to propel China toward high-income status.

The primary policy response so far by Chinese officialdom to the demographic challenge has been an attempt to boost fertility rates. China ended its nearly 40 years of strict birth control in 2016, and then officially adopted a three-child policy in 2021. However, socioeconomic issues, including anxiety over the rising costs of living and raising a child, and gender inequality in the workplace remain powerful deterrents for women considering having children. For example, with no national law on paternity leave to complement maternity leave, Chinese women are often expected to be the primary caretakers for children and put their careers second. As a result, working women face substantial job discrimination. Many working women have struggled to achieve independence and are not willing to sacrifice their careers and living standards to have more children. Without better welfare provisions or reforms to parental leave, efforts to boost fertility are unlikely to be successful.

But the size and distribution of the population is only part of the equation. At a lower level of economic development, raw manpower is extremely important in generating growth; but as the economy advances, a stronger safety net and mechanisms to develop and harness human talent become more important. This is consistent with the analysis of scholars like Hofman and Rozelle, among others, who emphasize that China’s best approach going forward is to tackle some of the structural issues affecting labor productivity and human capital, all of which could hamper long-term growth.

Why Demography Isn’t Destiny

Scholars of demography and China’s economy point to several areas that could help dampen the downsides of an aging population:

1. Focus on productivity

The main demographic challenge facing China in the coming years is not the number of people in the workforce, but rather, the economy’s overall productivity and the financial burden of retirees on the working-age population. Many economists agree that economic reforms could improve productivity as well as free up household savings to boost consumption. Policy goals should include enhancing the efficiency of the financial system, strengthening the fiscal system, improving the environment for the private sector, encouraging labor mobility through reform of the household registration (hukou) system, and de-escalating tensions with advanced economies.

In today’s China, low-skilled workers have increasingly few options as they leave the agricultural sector. Rozelle and his colleagues point out that jobs in manufacturing and construction are declining due to a combination of offshoring, automation, and a slowdown in the real estate sector. Thus, many lower-skilled workers are being forced to enter the labor-intensive service sector, taking jobs that are often poorly regulated and relatively insecure. A growing informal sector and uneven access to education may worsen these trends posing a challenge for China’s future economic trajectory.

2. Develop a better-educated labor force

Chinese graduates currently entering the labor force have on average 12 years of education, while those about to retire have an average of only 7 years. Hofman points out that this improved human capital can lead to increased productivity and general economic growth. However, research by Rozelle and others highlights that even though access to schooling is increasing in rural areas, the quality of education remains wanting. China’s average educational attainment is still lower than that of other countries at comparable levels of per capita income. Continuing education and retraining are also going to be increasingly important as the economy changes. The current education situation suggests that workers may find it challenging to transition from low-skilled to high-skilled jobs, potentially undermining China’s transition to high-value-added manufacturing.

3. Raise the retirement age

China’s current retirement age is among the lowest in the world – currently 60 for men, 55 for female office workers, and 50 for female blue-collar workers, and this hasn’t changed in decades despite the rising life expectancy. Based on Hofman’s estimates, if China’s elderly were to have the same labor force participation as Japan, there would be about 40 million more people at work by 2035. In China, there has been a debate about raising the retirement age, with proposals suggesting 65, but so far, the leadership has not explicitly shown the political will to move the policy forward.

4. Support automation

China is already at the forefront of automation, thanks to a government push to accelerate the adoption of industrial robots. This trend could mitigate the decline in population and skilled workers in the long-term. It could also help counter the flow of labor-intensive businesses out of China as wages continue to rise. This could, however, create new challenges as low-skilled workers are forced to enter the labor-intensive service sector as manufacturing jobs become even scarcer. Some research on the deployment of robots in China has found negative effects on employment and wages suggesting that there is still much to be learned on the impact of automation.

5. Strengthen the social safety net

A better social safety net would have multiple benefits for the economy including potentially incentivizing families to have more children. The first step is a stronger healthcare system that is accessible to the entire population at an affordable cost. China only spends less than 6 percent of its GDP on healthcare, compared to around 10 percent in the European Union and Japan. Low investment in healthcare means that senior care may be inadequate and place a higher burden on households. In addition, a better pension system would reduce the impact of the growing old-age dependency ratio on society, as households could count on reliable sources of funding to help support older relatives. Currently, the system discriminates against rural residents, while civil servants and public institution employees receive much better old-age insurance. A sustainable pension system would require the government to extend coverage to younger migrant workers and improve the fairness between different pension schemes to strengthen people’s incentives to participate. Relatedly, Chinese authorities need to expand the pension system and ensure its solvency is guaranteed regardless of the business cycle or other structural problems.

6. Open inward immigration

Currently, China continues to experience negative net migration, meaning that more people move abroad than those who migrate into the country. China has a very small number of inward immigrants, perhaps the lowest in Asia. There are almost no immigrants employed in labor-intensive sectors, with most being “expats” in white-collar jobs. Obtaining work authorization and access to social services is quite difficult for foreign workers in China. Expanding opportunities and access to affordable healthcare could increase China’s attractiveness for workers, improve the overall work environment, and help reduce the burden of retirees on the economy. Although the economic rationale for expanding inward immigration is clear, there is very little policy debate within China about moving in this direction. In practice, since China introduced its “green card” system in 2004, it has only issued about 11,000 ten-year residence permits from 2004-2016. Over that same period, the United States issued nearly 12 million green cards.

Conclusion

The greying of the population certainly puts pressure on China’s economic growth trajectory, but demography does not have to be destiny. The more important question is whether the Chinese government can respond effectively and quickly to the challenges posed by demographic trends. If the government manages to raise the productivity of the labor force and build a strong social safety net alongside other initiatives, then having an older population need not translate into economic decline. To live up to the challenge, however, the government will need to make many difficult decisions in the near term to correct its investment and development goals. Although some efforts are underway, including attempts at hukou reform and investment in education, the government will need to take more comprehensive action to address the challenges ahead. If Beijing fails to plan accordingly, the consequences attached to a declining population may well have large-scale negative implications for its economy.

Header Image: GREG BAKER/AFP via Getty Images.

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