China's Great Challenge Isn't America, But a Baby Bust

China's Great Challenge Isn't America, But a Baby Bust

A superpower denied? China’s economic growth rate will slow appreciably going forward, as will its pace of development and innovation, thanks to a demographics nightmare. And the world needs to take notice. 

Western media outlets frequently seem awed by both the fact of China’s economic success and the way leadership in Beijing has managed it – the country’s rate of growth, despite even the Covid pandemic; the torrid pace of modernization; and perhaps especially the ability of its centrally planned system to marshal resources for grand projects. Reporting about China, and many full-length books, often combine that awe with not a little fear of the power implicit in such accomplishments. Behind the veil of such reporting, however, lies considerable evidence that China will increasingly face economic problems, chief among them, its rapidly aging demographic profile. One bit of errant central planning, Beijing’s long-held one-child policy, has come now in the 2020s to starve the economy of an adequate workforce and so raise the average age of the population that China is poised to lose much of its economic dynamism and face severe growth constraints.

The critical demographic measure in China’s case is the relative size of its working population. It, more than most economic measures, gauges the human resources available to meet the population’s current needs and importantly to support investment for future growth. Because Beijing’s one-child policy so limited birth rates for decades, China is losing on this front. The flow of new people into the workforce is falling short of the numbers retiring out of it. United Nations (UN) demographers calculate that already China’s workforce has begun to shrink even as the country’s dependent elderly population has continued to grow rapidly. Limited labor resources, absolutely and relative to the largely unproductive retirees, cannot help but limit the country’s economic options. Of course, labor power is not the whole story. Technological advances, especially artificial intelligence (AI), and productivity increases will allow more efficient use of China’s available human resources, but the demographic situation will impose constraints nonetheless, especially when it comes to the huge development projects that have awed so many around the world, including the so-called “Belt and Road,” as well as China’s military buildup.

Matters looked very different years ago when China’s great development surge began. In the late 1970s, the country’s demographic profile might have easily been described as ideal for growth. As Deng Xiaoping declared new directions for the country, the one-child he also promulgated had yet to affect the working population. While it slowed the pace of new births, previously high rates of fertility had left China with a vast number of people ready for work. The generally accepted definition of the working-age demographic cohort, that part of the population between the ages of 15 and 64 amounted to some 90% of the adult population back then. This army of workers could easily support the remaining 10% of adults who had retired and at the same time step up to the labor and management demands of rapid industrialization. China certainly had a far more favorable demographic configuration than the United States, where at the time had a working-age population equal to some 81% of the adult population. China’s demographics were not the only contributor to its fabulous growth, but the favorable nature of its population’s age mix certainly played a role.

As the one-child policy persisted, however, it began to change this once favorable age mix. UN demographers estimate that the one-child policy cut the nation’s fertility to less than replacement, some 1.6 births during the average woman’s lifetime. By 2000, the depressed fertility rate had limited the flow of young people into the workforce sufficiently to reduce the 15-64 age group to 86% of the adult population, still high by global and U.S. standards, but a considerable change during what for demographics is a very short time span. Over succeeding years, while the flow of new entrants to China’s workforce became a trickle, many who were still young when Deng began his development process began to retire. The absolute number of working-age people stagnated. In 2020, UN demographers estimate that absolute numbers in China’s working-age population were no higher than at the turn of the century and had fallen farther to only some 83% of the adult population. The number of dependent retirees had grown to some 17% of that population. China, which had nine workers for every retiree in 1978 had slightly less than five, only marginally better than the United States.

Even though Beijing has recently relaxed its one-child policy, the fertility rate seems not to have risen. Even if it does eventually rise, it will take 15-20 years before it can begin to affect numbers in the working population. Nor can China look to in-migration as a way to alleviate the strain. Few seem eager to enter Beijing’s jurisdiction, and given the size of China’s population, migrant flows would have to break records by a wide margin to have any substantive impact on the relative number of workers. China, in other words, must live increasingly with the severe economic constraints imposed by a past policy error.  By 2040, absolute numbers in the country’s working population will, according to UN estimates, have declined by 10%, while its population of dependent retirees will have increased some 50%. The economy will have barely three workers for each dependent retiree. Those three workers will have to produce enough for their own needs, those of their other dependents, and one-third of a retiree’s support. With little surplus production available for future investments much less grand projects.  The economy will have lost much of its dynamism and flexibility. 

Aging demographics will also threaten China’s ability to innovate. Demographers, using patent data and statistics on Nobel Prize winners have determined that people in the 30-40 age cohort provide the bulk of society’s inventiveness.  Cross-country studies show that this fact holds in all cultures and economic systems. This age cohort in China is set to shrink over the next 20 years from 43% of the workforce to 37%. This loss may do less damage to China’s centrally planned economy than it would to a more open Western economy that depends on the competition for innovation, but it is nonetheless hardly a positive for China’s economy going forward.

On the financial side of the equation, the need to care for the elderly will impose additional restraints on China’s economic outlook. With fully 25% of the adult population over 64 years of age in 2040, China will qualify as what demographers quaintly call a “super-aged” population, more extreme than even Japan presently. Since at last count less than 65% of Chinese workers have any kind of pension plan, much of the burden of supporting this huge population of retirees will fall on Beijing’s shoulders or on those of the provincial and local governments, which in China amounts to the same thing. These huge financial demands will absorb tremendous amounts of the government’s resources. The International Monetary Fund (IMF) estimates that already Beijing’s unfunded pension obligations amount to 100% of the country’s gross domestic product (GDP). Unless Beijing’s decision-makers act quickly, which they seem to have no plans to do, that burden will only grow.

None of this says that China will disappear as a major power or that its economy will cease growing. It does say, however, that contrary to most of today’s media discussions, China’s economic growth rate will slow appreciably going forward, as will its pace of development and innovation. Beijing will be less able to wow observers with grand investment schemes, including its ambitious and in many ways ominous Belt and Road initiative. Circumstances will also impose on Beijing’s military and space ambitions, though these are inexpensive in both financial and economic terms compared with either development or future pension demands. China will begin to resemble Japan in crucial ways, except that Japan got rich before it aged, whereas China, still not rich, will age first.              

Milton Ezrati is a contributing editor at the National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York-based communications firm. His latest book is Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live.