Author: Bert Hofman, NUS

China’s latest population census, a one-time event per decade, was released in early May, triggering the government’s new three-child policy. Data shows that China’s population growth has slowed to 0.53 percent per year over the past decade, slightly lower than the growth rate of the previous decade, but still above some 70-plus countries.

China’s population will begin to decline over the next decade and will likely continue to decline for the remainder of this century. According to Ning Jishe, head of the National Bureau of Statistics (NBS), China’s total fertility rate – the number of children a woman will have in her lifetime – is now only 1.3. This is the lowest among countries with similar incomes and well below the 2.1 needed to maintain a stable population.

Even during the era of China’s one-child policy, which was abolished in 2015, the number was never less than 1.6. After a brief babysitter in 2017, the move to a two-child policy was not a game-changer.

Authorities have responded to the latest census data by further relaxing its family policy, allowing three children per couple, and have promised supportive approaches to convince couples to have more children. While measures such as baby bonuses, tax credits, better child care and tackling discrimination in the workplace can help, few countries in similar circumstances in the past have experienced a major rebound in fertility.

With a total fertility rate of 1.3, the Chinese population will decline faster than expected. Current projections from the United Nations Population Division’s “medium variant” assumed a total fertility rate of 1.7, implying a population of around one billion by the year 2100.

The real rate is rather closer to the 1.2 assumed in the projection of the “low variant” which predicts a population of less than 700 million in the same time frame.

Does this mean that China will not be able to overtake the United States economically? Not necessarily.

Demographics have already stopped contributing to China’s economic growth. The workforce has been declining since 2012 and is now 40 million less than ten years ago.

Accumulated human capital – China’s investments in education – will play an increasing role in productivity as the better educated enter the workforce. Since the last census, the share of university graduates has almost doubled to 15%. Among the current cohort entering the workforce, higher education is nearly 40 percent, comparable to that of South Korea when it reached China’s current per capita income.

Even with lower fertility, the population decline will not take hold until the end of the decade. By 2035, China’s population will still be 1.41 billion in the UN’s low variant projection, roughly the same as today. It will only be 50 million less than expected in the medium variant, which is not enough to make a significant economic difference.

China also still has a large hidden reserve of manpower that it can mobilize. The country’s young retirement age – 60 for men, 55 for women – means the workforce is smaller than it should be. If China could achieve the same labor force participation among the elderly as Japan, by the end of the decade the labor force would be around 5 percent – 40 million people – bigger.

Technological development, robotization and artificial intelligence will make it possible to work longer and more productively, and to take better care of the elderly than in the past. Now is the right time for societies to age before they get richer – which have accumulated human capital assets among the working age group and young people in particular.

The Chinese population over 60 represents 18.7% of the total population, up more than 5% from ten years ago. China’s pension system is not in good shape. According to the Chinese Academy of Social Sciences projections, by the mid-1930s, China’s pension funds will be exhausted.

The balance of the urban pension system in 2019 was 4.3 trillion RMB (US $ 669 billion) and the National Social Security Fund contained an additional 2.7 trillion RMB (US $ 420 billion). Including the corporate annuity pillar, China’s total public and private pensions in 2019 were valued at just US $ 1.85 trillion, or 12% of GDP, compared to 136% in the US and 66% in Japan.

The state budget contributes 580 billion RMB ($ 90 billion) each year to fund pensions. In addition, the rural pension system is still in its infancy – more than half of rural retirees depend on modest pensions which on average represent less than 10% of the average urban pension. The retirement debt that will accumulate when these systems become more equal is enormous.

These fiscal pressures come at a time when China’s fiscal resources as a percentage of GDP are shrinking. The conversion to a consumption-based value-added tax in 2016 and tax relief measures in the wake of COVID-19 mean that China’s tax revenues now represent just 19% of GDP, up from 22% in 2015, just over half of the 34 percent of GDP that OECD countries generate.

The Chinese government could take on more debt to finance the costs of aging, but with the increase in the debt ratio to 90% of GDP, fiscal space has shrunk considerably since the global financial crisis. It could also tap into the vast holdings of state-owned companies to fund the spread, but current policy directions are unlikely to allow the sale of those assets.

While demographics present these challenges, China’s economic dynamics over the next two decades are unlikely to be reversed, and its policy resets are designed to ease its drag on longer-term growth.

Bert Hofman is Professor of Practice and Director of the East Asian Institute, National University of Singapore.