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Monday 28 January 2019

China’s age-old problem

More pensioners and fewer workers does not add up for China and its economic prospects

By George Magnus

China is the fastest ageing country on the planet. Its age structure will shift in the next 22 years by as much as it has done in older Western countries over the past 80-100 years, but with a quarter of the income per head of the latter. This is what people mean when they say China will get old before it gets rich.

The Chinese problem with ageing is not so much rising life expectancy as low fertility. Fewer children are growing up to become workers and replace the surge in older citizens leaving the workforce. Ever more pensioners will rely on a smaller working-age population.

The effects of this will be glacial and cumulative rather than cyclical and sudden, but nonetheless significant. And it comes at a bad time: China has problems with governance, is trying to reduce the country’s debt dependence and rebalance growth away from a reliance on investment. All of these things would weigh on growth anyway.

Things are pretty bad. The so-called “replacement fertility rate”, at which the population would be stable, stands at about 2.07 children per woman of child-bearing age. But China’s fertility rate is officially about 1.6.

That official fertility rate may, however, be too high. Official data do not align well with hospital records. Demographers at the University of Wisconsin-Madison have estimated that the rate may be as low as 1.2 children. It was also announced recently that the number of births in China fell 12 per cent in 2018, following a 4 per cent drop the previous year.

Retired Chinese men sit on a bench in Beijing

People blame the one-child policy (OCP) but by the time it was introduced in 1979, the fertility rate had already slumped to 2.3 children – down from 5.8 children in the prior decade. In any event, the Party announced the end of OCP in 2013. By 2016, it was actively encouraging families to have two children. But boosting fertility is hard.

Rising living standards – including both higher incomes and better education – are the best contraception known to mankind. These are evident in China, along with other fertility-depressants such as rising costs for education and housing, urbanisation and better work opportunities for urban women.

Other constraints are feeding in, too. The number of women aged 20-29 is predicted to fall 37 per cent by 2025, and by 50 per cent by 2050.

Other old Asian and Western countries, at China’s stage in the ageing process, could still look forward to an expanding working-age population. China’s is already declining. There are 7.7 workers who support each older citizen today. It will be just 2.1 in 30 years’ time. The core of the working-age population, people aged 20-39, is shrinking the most.

One of the economic consequences of ageing is that labour and skill shortages may develop as the number of young workers entering the labour force declines. More migration from rural to urban areas would offset that, but this overlooks another problem: the rural elderly. A large number of now-older women have returned from cities to tend to ageing parents and grandparents.

Younger generations in urban areas are better educated, more white collar, have a stronger sense of individualism, and are more mobile. This phenomenon has increased both physical and cultural distance between family members.

A Chinese worker waits for customers at a grocery store

Robotics and automation could, of course, offset some of the risks of labour and skill shortages – but given the significance of factory work in urban areas and physical labour in the countryside, it could mean a very fundamental retooling of the Chinese economy.

It could also spend more on the elderly, to avoid placing this burden on families. But the cost of ageing is already expected to rocket. China currently spends about 7 to 8 per cent of GDP on pensions and healthcare, or roughly half of the level that is typical in richer economies. Over the next three decades, it is expected that all countries will have to step up their age-related spending to about 25 per cent of GDP (slightly less than this in China’s case).

What can be done? Nothing easy.

China could try to address ageing via higher immigration, to which it is unfavourably disposed. It could seek higher proportions of women and older workers in employment, which China could accommodate if it raised low retirement ages and adopted family-friendly policies. It could, of course, also simply try to build a more productive economy – but that is an elixir that everyone always wants.

Demographics are not destiny but they may end up as a hefty tax on China’s already sliding growth potential.

George Magnus is an associate at the University of Oxford China Centre and SOAS, and author of Red Flags: Why Xi’s China is in Jeopardy (Yale, 2018).

 

Local villagers watch a Sichuan Opera

All pictures Getty Images