China Bets on Productivity Over Population to Drive Its Economy
Employees work on a production line for electric forklifts at a factory in Huzhou, Zhejiang province, China. (Photographer: Qilai Shen/Bloomberg)

China Bets on Productivity Over Population to Drive Its Economy

Discover what’s driving the global economy and what it means for policy makers, businesses, investors and you with The New Economy Daily. Sign up here.

With a well-paid job in one of China’s wealthiest cities, Chen Xiaoyu decided it was time to get married this year. But starting a family is not on the agenda.

“If possible, I would want to get sterilized,” said Chen, 29, who works at a hospital office in Shanghai. “The financial pressure is unimaginable. I just couldn’t afford the cost of raising a child on top of housing loans.”

China’s once-in-a-decade census released on Tuesday shows that amid the uncertainties of the coronavirus pandemic last year, the number of births nationwide fell to the lowest level since 1961, when the country was struggling following a nationwide famine that killed tens of millions of people.

China Bets on Productivity Over Population to Drive Its Economy

The views of women like Chen -- and the experiences of other North Asian economies like Japan, South Korea, Hong Kong and Taiwan -- suggest there’s little prospect of changing that trend. As a result, China’s total population could peak in the next few years, spurring profound changes for the world’s second-biggest economy.

To ensure economic growth doesn’t slow in line with the population drag, Beijing will need to undertake a challenging shift in its growth model, rapidly increasing spending on pensions and health care while maintaining a high-level of corporate and state investment in order to upgrade its vast industrial sector.

A successful transition would mean China becomes the world’s largest economy, continuing to propel global demand for commodities in the coming decades, while its gray consumers become a vast market for multinationals, with a huge pool of pension savings targeted by global finance companies. A failed response could mean China never eclipses the U.S., or does so only fleetingly.

China Bets on Productivity Over Population to Drive Its Economy

“They have been plotting their whole growth strategy to be congruent with demographic change,” said Lauren Johnston, a China economics and demography expert at SOAS University of London. “China’s role as the labor-intensive factory of the world has to go. They have to move to capital-intensive growth.”

Beijing has a two-pronged approach to maintaining economic growth as its population shrinks. First, it intends to slow the decline of the urban workforce by raising the retirement age and encouraging migration of more of the country’s 510 million rural residents to cities. Second, it plans to raise productivity -- a measure of economic output per worker -- with the latest five-year plan emphasizing better vocational education and more investment in scientific research, automation and digital infrastructure.

China Bets on Productivity Over Population to Drive Its Economy

China’s government has been preparing for a decline in the population since the 1970s, when rising levels of education and work participation among women resulted in smaller family sizes, a trend accelerated by its imposition of a “one child” policy for most families due to fears of resource shortages. The birth rate has continued to decline even after China eased some restrictions on family size in 2016, suggesting further relaxation would have little impact as social norms have shifted.

Because it’s betting on productivity gains, demographers don’t expect China’s government to launch an all-out effort to raise births.

“It’s oversimplified to think they will have very pro-natalist policy,” said Stuart Gietel-Basten, director of the Center for Aging Science at the Hong Kong University of Science and Technology.

Demographic Drag

China will need to defy a regional trend, where declining fertility rates have tended to coincide with slow or stagnant economic growth. Both South Korea and Taiwan saw their populations drop for the first time in 2020, following years of declining birth rates. Japan’s population peaked a decade ago already.

While European countries and the U.S. have been more willing to increase the number of overseas-born workers, China is more likely to follow east Asian neighbors by tightly controlling immigration.

Regional Divide, Urbanization: What Else to Know in China Census

Some argue that China’s problem is more severe, as it faces a demographic transition before it has attained developed-world levels of income. It will be “old before rich,” the argument goes.

But the effect is the opposite, SOAS’ Johnston says, mainly due to rising education levels that should make the population more productive. Nearly 9 million Chinese people graduated from university last year, up from 1 million in 2000.

“China’s younger people are much, much more educated than older people,” she said. “Whereas in Japan the elderly are professionals, in China they are not losing the level of human capital that the “old after rich” countries are.”

China Bets on Productivity Over Population to Drive Its Economy

The government plans to gradually raise the retirement age from the current level of 60 years for men and as low as 50 for women, and plans for 50 million people to move permanently from rural to urban areas in the next five years to take up service and manufacturing jobs with higher wages.

Chi Lo, senior China economist at BNP Paribas Asset Management, estimates that a universal retirement age of 65 and loosening of internal migration restrictions could add at least 150 million to the urban workforce by 2035. As a result, “the population peaking doesn’t make much of a difference in the next 10-15 years,” he said.

China Bets on Productivity Over Population to Drive Its Economy

Coming up with the right policies is one thing, but implementing them is likely to be tough. There has already been an online backlash to a retirement age hike, while there will be severe challenges meeting pension expenditures.

The Chinese Academy of Social Sciences, a government think-tank, has estimated that on current trend the main urban pension fund will run out by 2035. The balance in 2019 was 4.3 trillion yuan ($669 billion).

Beijing is betting on selling off its assets to help plug the gap. State-owned companies have transferred shares worth 1.68 trillion yuan to state pension funds in the three years to 2020, representing a small proportion of their total assets, which were last reported to be 234 trillion yuan.

Adding to fiscal pressures, Beijing will have to make pensions more generous to maintain economic growth. Cai Fang, a renowned population economist who was recently appointed to the central bank’s monetary policy committee, has warned of a possible threat to the economy from the “demand-side” effects of aging.

As pensions are lower than wages and the elderly spend less on childcare, they tend to spend less than working-age people, he argues. That raises the potential for dis-inflationary forces that have been seen in Japan, as demand for new goods and services falls short of production, discouraging new investment.

Fiscal Pressures

The answer, Cai argued in a speech last month, is to increase government spending to supplement the incomes of the hundreds of millions of people who are most likely to spend -- pensioners, rural residents just above the country’s poverty line, and migrant workers. Doing that would double the size of the country’s middle class. This could be “China’s new advantage in international competition,” he said.

Health spending will need to rise too, almost certainly requiring tax increases on working-age people, a politically difficult task.

Wang Feng, an expert on Chinese demographics at the University of California Irvine, estimates that if China increases pension, health care and education provision to levels similar to those seen in developed countries a decade ago, spending on those programs will increase to 20% of GDP by 2030. That is more than the 17% of GDP the government currently takes in through taxes, meaning such spending would consume all of the state’s fiscal revenues.

“China’s economy will continue to expand and population aging brings new opportunities,” Wang said. “But in terms of state fiscal obligations, the prospect will become increasingly concerning. The government can of course increase taxes, and it will have to, but it is not always easy. There will be a ‘stress test’ for the government.”

China could also try to spur birth rates by subsidizing childcare or housing to lower parenting costs, and crack down on workplace discrimination against women. But while beneficial to women, such changes are unlikely to lead to a dramatic change in trends, according to demographers. As in East Asia and Europe, preferences have shifted.

Tian Lijun, a 30-year-old flower shop owner in Beijing, said she valued freedom above having children.

“I’m living a very happy life, going wherever I want and working however late I want,” she said. “Having a child is so exhausting and it will surely bring down the quality of my lifestyle.”

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.