Even before COVID, China was facing stiff headwinds from an ageing population.
These headwinds stem from the nation’s ‘one child policy’, which came into effect in the early-1970s and was credited with preventing around 400 million births from 1979 to 2010.
The ‘one child policy’ initially produced a population pyramid that was optimal to economic growth, since there were less children to support. This meant that China’s population was dominated by people that were neither young nor old, but in the middle (i.e. working age).
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This demographic dividend provided by the one child policy has since turned into a curse.
The United Nations forecasted that the number of working aged people to dependents in China would almost halve over the 50 years to 2065, from a peak of 1.9 workers to dependents in 2015 to only 1.0 by 2065:
The reason is that the working aged people that drove China’s economy are now moving into old age, with not enough young people coming up to offset them due to the now abandoned one child policy.
Cai Fang, a member of the People’s Bank of China (PBOC) monetary policy committee has warned that China’s population will peak in only four years’ time and will be marked by a significant downturn in consumer demand:
“When the total population enters negative growth [after 2025], there will be a shortage of demand”…
“We need to pay attention to the impact of demographics on future consumption”…
Cai, who joined the central bank’s advisory body last month after retiring from the Chinese Academy of Social Sciences, said the number of Chinese of working age had been in decline since 2010…
The paper… said the proportion of elderly people among the total population rose to almost 13 per cent in 2019, from 7 per cent in 2000, and could hit 14 per cent by 2022.
Beijing estimates the national fertility rate at just 1.5 children per woman, which is one of the lowest in the world…
Cai said that if people of working age were faced with the additional financial burden of looking after an elderly relative while trying to raise a family it would make them more likely to save than consume.
The PBOC recently published a paper highlighting the ageing problem and called for the further easing of the two-child policy alongside an increase in support for women to encourage them to have more children.
Perversely, encouraging more children will only make China’s demographic problems worse in the short to medium term (but better in the long-term). This is because China’s shrinking working aged population would be required to support both a growing number of elderly citizens as well as more children, thereby worsening China’s dependency ratio.
China’s demographics are looking similar to Japan’s thirty years ago (see below chart). The only difference is that Japan was already rich when it entered its demographic bust.
Thus, it is debateable whether China can escape the “middle-income trap”. It will very likely ‘grow old’ before it ‘gets rich’.