Easing birth limits won’t solve China’s ageing woes

Demographics is destiny, they say.

China’s ageing population has long been considered the economy’s number one long-term headwind.

The ‘One Child Policy’ implemented in the 1970s and abolished in 2016 was credited with preventing some 400 million births between 1979 to 2010.

The policy initially created a demographic structure that was ideal for economic growth, since China had a large number of workers supporting a few number of dependents (both young and old).

However, as the decades have passed, and these workers have grown old and retired, China is suddenly facing a rapidly ageing demographic structure that will weigh heavily on the nation’s growth and development.

Previous projections from the United Nations (UN) forecast 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:

China workers per dependent

The number of workers to non-workers in China is falling fast.

Thus, China’s demographic structure was predicted by the UN to emulate Japan’s thirty years prior (see below chart). The only difference being that Japan was already a ‘rich’ developed nation when it entered its ageing ‘bust’.

China vs Japan Dependency Ratio

China shares Japan’s demographic profile.

China’s population appears is ageing faster than projected. The 2020 Census showed that China’s fertility rate fell to 1.3 in 2020 – way below the replacement level of 2.1. The Census also recorded the slowest population growth in decades, with an average annual growth rate of 0.53% over the past decade, down from a rate of 0.57% between 2000 and 2010 – bringing the population to 1.41 billion.

Analysts have described the situation as an “intensifying demographic crisis” suggesting “China’s population was entering a slide almost impossible to reverse, with profound economic implications”.

As a response, Beijing now plans to clear remaining legal barriers to encourage couples to have more children:

Communist Party leaders had recently approved a three-child policy and agreed to remove penalties imposed on people for having too many children. The revised law expected next month would codify that…

All remaining penalties for violating birth limits should be removed in the revision to provide a legal framework to encourage births, said He Yafu, an independent demographer based in Guangdong.

These birth reforms would be positive for the Chinese economy in the very long-term, since they would help to ease labour shortages and spread the costs of a rapidly ageing population.

However, their implications over the short to medium-term for the economy would be negative, as China’s shrinking working aged population would be required to support both a growing number of elderly citizens as well as more children, thus worsening China’s dependency ratio.

Ideally, the births policy change would also be accompanied by social security reforms that provide a safety net to displaced workers, as well as childcare. This would alleviate anxiety about job security, encourage child-rearing and help to lift domestic demand.

Regardless, the ship has well as truly sailed on China’s demographics, and belated attempts to increase the birth rate will not avert the coming ageing headwinds, at least over the short to medium-term.

Unconventional Economist
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