Indian Council of World Affairs

China is facing tremendous challenges due to its shrinking population. It is affecting the Chinese economy and society and has led to a declining demographic dividend.[i] According to a report published by the Chinese National Population and Family Planning Commission (NPFPC), the population dropped by 850,000 in 2022.[ii] Since 2012, the working-age population in China has been on a decline. COVID-19 pandemic, and ensuing economic slowdown has impacted China in a profound manner. Keeping these events in mind, this viewpoint aims to examine the declining demographic dividend and its implications on the geopolitics of China.

China’s One-Child Policy and Demographic Dividend

In the 1970s, the Chinese government came up with a policy called “later, longer, fewer” leading to later marriages, longer birth intervals, and fewer births.[iii] Post implementation of “later, longer, fewer” campaign China’s birthrate started trending down. In just a decade, the fertility rate crashed down to 2.7 babies per women in 1980s. The government thought the birth rate was not low enough and therefore implemented the extreme “one child policy”, which restricted most of the couples to one child.[iv]

Due to the restrictions, the Chinese Total Fertility Rate (TFR) fell below the required 2.1 birth per family.[v] The TFR of China was around 1.5 births per woman till 2020.[vi] Since 2020, it has fallen to a historic low of 1.3 children per woman.[vii] In 2021, President Xi Jinping revised the law that allows couples to have three children, known as the “three child policy”.[viii]

From the income perspective, there have been other discernible trends. In 2022, the average per capita disposable income of rural households in China stood at around 20,133 Yuan ($245), which was approximately 40 per cent of the income earned by urban households. This indicates a significant disparity between the income levels of rural and urban areas in China.[ix] Many in the rural areas still have not benefited from China’s economic boom. Also, comparatively China’s per capita income is still lower than the countries such as Japan, the Republic of Korea (RoK), and the United States.

It may be noted that the slowdown in economy in the last few years has made it difficult for China to build out safety nets such as healthcare for elderly and properly funded pension schemes.[x] Liang Jianzhang, an expert in the field of applied economics, suggested the demographic challenge as “a long-term time bomb”.[xi] The rise in cost of living as well as shortage of workers in China are also increasing the wages of employees in the manufacturing sector.[xii] The higher wages can impact China’s competitiveness in the international market and can potentially lead companies to shift their production out of China, possibly,  to the countries with more competitive wages, such as Vietnam and India, and the recent push by the countries to diversify their supply chain will also play an important role in the matter.[xiii] Consequently, the higher wages can cause higher inflation in the Chinese economy.

Impact of COVID-19 on Chinese Population and Economy

According to an International Monetary Fund (IMF) Report published in 2023, in the long run China faces two major concerns, “shrinking population and slowing productivity growth”.[xiv]

COVID-19 has had a deep impact on the declining population of China. Reports indicate that the pandemic has affected the Chinese society as well, leading to postponement of marriage, delays in childbearing due to uncertainties surrounding the disease and its economic consequences.

The “zero-covid policy” has affected the Chinese economy significantly. The economic growth in 2022 was the second lowest in almost half a century. In 2022, the government had forecasted that the economy would grow by about 5.5 per cent but, in reality, it only grew by about 3 per cent.[xv] The IMF expects China to grow at 5.2 per cent this year. However, in the second quarter of 2023 China’s real GDP declined by about 1.4 per cent, which has happened only 4 times in the last 40 quarters (10 years).[xvi]

COVID-19 has also affected Chinese exports and employment. The exports make up about one-fifth of the Chinese economy. China’s post pandemic recovery has also slowed down due to the faltering export demand. Reportedly, around 4.4 million small business closed between January and November 2021.[xvii] COVID-19 and related economic factors could be understood as probable causes. In the month of June 2023 alone dollar value of China’s export shrank more than 12 per cent. [xviii]

Impact on Geopolitics

The demographic and economic issues have potential to slowdown China’s economic growth. According to a report published by Australian Strategic Policy Institute (ASPI), by 2030, China’s median age will be five and half year greater than that of the United States and secondly, by mid 2030s China’s old age dependency ratio (the number of people over 64 years, divided by those aged 15–64 years) will also begin to favor the United States. [xix]  In a report published by United Nations’, the “median variant” projections highlights that China’s population can possibly decline to 700 million whereas the United States’ population will increase to about 400 million by 2100. In all the three variants of the projections China’s population declines.[xx] The growth rate of China’s GDP is also expected to fall below the growth rate of the United States somewhere between 2031 and 2035.

China’s declining demographic dividend will have a significant impact on the geopolitics given China’s size. Some experts believe, “the resulting economic and population decline will erode China’s strength in the coming decades and the leaders might become more aggressive as they feel their national power has ebbed”.[xxi] As the population declines, China’s population which is fit for military service will also start to decline. Population decline and lowering working age population also lowers the rate of innovation, since change tends to come from younger workers and entrepreneurs.[xxii]

China may increase automation in the manufacturing industry, but this could lead to unemployment and greater number of retired population dependent on a smaller number of working-age population.[xxiii] In 2022, China spent 5.2 per cent of GDP on pension schemes. But, by 2050, China might need to spend around 15 per cent of GDP on pension policies.[xxiv] Boosting declining productivity growth will be of prime concern for China in the coming years as the population and the return on capital investment are diminishing due to the economic slowdown.[xxv]

Conclusion

Faced with these demographic and economic issues, China's future trajectory will be determined by its capacity to adapt, invest in human capital, support long-term economic growth, and collaborate with other nations. The decline in China's population has complex ramifications for the country's social, economic, and geopolitical landscape. The COVID-19 pandemic has further accelerated the population drop by influencing marital patterns and family formation. The economic implications of the pandemic have exacerbated China's problems. The declining demographic dividend in China poses a threat to its status in the coming times.

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*Aditya Kumar, Research Intern, Indian Council of World Affairs, New Delhi
Disclaimer: Views expressed are personal.

Endnotes

[i] The United Nations Population Fund defines demographic dividend as “a period in which the working-age population has good health, quality education, decent employment, and a lower proportion of young dependents. Smaller numbers of children per household generally lead to larger investments per child, more freedom for women to enter the formal workforce and more household savings for old age”.

[ii] Buckley, Chris, Joy Dong, and Amy Chang Chien.  “A Shrinking, Aging China May Have Backed Itself into a Corner.” The New York Times. January 19, 2023. https://www.nytimes.com/2023/01/18/world/asia/china-populationpolitics.html?searchResultPosition=5/  (Accessed on July 10, 2023).

[iii] Singh, Teshu. “Demographic Dividend in China the Challenge Ahead on JSTOR.” JSTOR. April 1, 2012. https://www.jstor.org/stable/resrep09269/  (Accessed on July 9, 2023).

[iv] Gu, B. “Fertility in China: From the 1970s to the 1990s.” PubMed. October 1, 1994. https://pubmed.ncbi.nlm.nih.gov/12319286/ (Accessed on July 9, 2023).

[v] Whyte, Martin, Wang Feng, and Yong Cai. “Challenging Myths About China’s One-Child Policy.” The China Journal 74 (008). 2005, https://scholar.harvard.edu/files/martinwhyte/files/challenging_myths_published_version.pdf/ (Accessed on July 9, 2023).

[vi] Retherford, Robert D., Minja Kim Choe, Jiajian Chen, Li Xiru, and Cui Hongyan. 2005. “How Far Has Fertility in China Really Declined?” Population and Development Review 31 (1): 57–84. https://doi.org/10.1111/j.1728-4457.2005.00052.x/  (Accessed on July 9, 2023).

[vii] “China’s Fertility Rate May Become ‘World’s Lowest’ without Strong Intervention Policy, India May Overtake China by 2023: Demographers.” The Global Times. May 11, 2021. https://www.globaltimes.cn/page/202105/1223141.shtml/  (Accessed on July 13, 2023).

[viii] “Xinhua Headlines: China Unveils Details of Three-Child Policy, Support Measures - Xinhua | English.News.Cn.” . Xinhua. July 21, 2021. http://www.xinhuanet.com/english/2021-07/21/c_1310073319.htm#:~:text=The%20decision%20on%20improving%20birth,policy%20over%20the%20past%20decade/ (Accessed on July 20, 2023).

[ix] “Average Annual per Capita Disposable Income of Urban and Rural Households in China from 1990 to 2022.” Statista. 2022.  https://www.statista.com/statistics/259451/annual-per-capita-disposable-income-of-rural-and-urban-households-in-china/#:~:text=In%202022%2C%20the%20average%20annual,the%20income%20of%20urban%20households/  (Accessed on July 12, 2023).

[x] Wee, Sui Lee. “China’s Census Shows Population Barely Grew in 10 Years as Births Plummet.” The New York Times. May 31, 2021. https://www.nytimes.com/2021/05/10/china-census-births-fall.html?searchResultPosition=8/  (Accessed on July 12, 2023).

[xi] Wee, Sui-Lee. “China’s Census Shows Population Barely Grew in 10 Years as Births Plummet.” The New York Times. May 31, 2021. https://www.nytimes.com/2021/05/10/china-census-births-fall.html/ (Accessed on July 13, 2023).

[xii] Kawakami, Takashi. “Minimum Wage Hikes Sweep China in ‘Common Prosperity’ Push.” Nikkei Asia. December 2, 2021. https://asia.nikkei.com/Economy/Minimum-wage-hikes-sweep-China-in-common-prosperity-push/ (Accessed on July 13, 2023).

[xiii] Varma, Sonal, Ting Lu, Charnon Boonnuch, Lischeng Wang, and Jing Wang. “Nomura.” Nomura Connects. June 15, 2022. https://www.nomuraconnects.com/focused-thinking-posts/diversification-from-china/ (Accessed on July 13, 2023).

[xiv] “China’s Economy Is Rebounding, But Reforms Are Still Needed.”  IMF. February 2, 2023. https://www.imf.org/en/News/Articles/2023/02/02/cf-chinas-economy-is-rebounding-but-reforms-are-still-needed#:~:text=China's%20economy%20is%20set%20to,versus%203%20percent%20last%20year/ (Accessed on July 13, 2023).

[xvi] The Economist. 2023. “How Much Trouble Is China’s Economy in?” The Economist, July 18, 2023. https://www.economist.com/finance-and-economics/2023/07/17/chinas-floundering-economy-is-a-test-for-xi-jinping (Accessed on July 18, 2023)

[xvii] Xia, Cai. 2023. “The Weakness of Xi Jinping: How Hubris and Paranoia Threaten China’s Future.” Foreign Affairs, April 4, 2023. https://www.foreignaffairs.com/china/xi-jinping-china-weakness-hubris-paranoia-threaten-future/ (Accessed on July 18, 2023)

[xviii] Hannam, Peter. 2023. “China GDP Growth Falls Short of Expectations as Sinking Property Prices Hit Economy.” The Guardian, July 18, 2023. https://www.theguardian.com/business/2023/jul/17/china-gdp-growth-down-economy-june-quarter-gross-domestic-profit#:~:text=Compared%20with%20a%20year%20earlier,according%20to%20a%20Reuters%20survey/ (Accessed July 18, 2023).

[xix] Fuxian, Yi. “The Geopolitical Implications of China’s Declining Population.” The Strategist. February 23, 2023. https://www.aspistrategist.org.au/the-geopolitical-implications-of-chinas-declining-population/ (Accessed on July 17, 2023).

[xx] United Nations Department of Economic and Social Affairs “World Population Prospects 2022.” www.un.org. United Nations Department of Economic and Social Affairs. https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/wpp2022_summary_of_results.pdf (Accessed on July 14, 2023).

[xxi] Buckley, Chris. “A Shrinking, Aging China May Have Backed Itself into a Corner.” The Japan Times. January 20, 2023. https://www.japantimes.co.jp/news/2023/01/19/asia-pacific/social-issues-asia-pacific/shrinking-aging-china-problems/ (Accessed on July 13, 2023).

[xxii] Kotkin, Joel. “Death Spiral Demographics: The Countries Shrinking The Fastest.” Forbes, February 1, 2017.. https://www.forbes.com/sites/joelkotkin/2017/02/01/death-spiral-demographics-the-countries-shrinking-the-fastest/?sh=66002c99b83c/ (Accessed on July 21, 2023).

[xxiii] Kharpal, Arjun. “From Driverless Cars to Robotic Warehouses, China Looks to Automation to Get Ahead of Labor Shortage.” CNBC. May 25, 2021. https://www.cnbc.com/2021/05/24/china-looks-to-automation-to-solve-population-issues.html (Accessed on July 12, 2023).

[xxiv] Zuo, Xuejin, Xiujian Peng, Xin Yang, Philip Adams, and Meifeng Wang.. “Title: Population Ageing and the Impact of Later Retirement on the Pension System in China: An Applied Dynamic General Equilibrium Analysis.” ISBN 978-1-921654-11-4. April, 2020. www.copsmodels.com. Melbourne, Australia: Victoria University. https://www.copsmodels.com/ftp/workpapr/g-303.pdf (Accessed on July 21, 2023)

[xxv] “China’s Economy Is Rebounding, But Reforms Are Still Needed.” IMF. February 2, 2023. https://www.imf.org/en/News/Articles/2023/02/02/cf-chinas-economy-is-rebounding-but-reforms-are-still-needed#:~:text=China's%20economy%20is%20set%20to,versus%203%20percent%20last%20year/ (Accessed on July 13, 2023).