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China’s Struggle With Demographic Change

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China Power

China’s Struggle With Demographic Change

Will China’s aging population bring down the economy?

China’s Struggle With Demographic Change
Credit: Flickr/ timquijano

China’s rapid aging process is not only changing the makeup of society, but it is also dramatically impacting China’s future economic growth prospects and putting huge pressure on government finances.

In 1987, the early days of China’s economic miracle, 63.8 percent of the population were of working age, and 4.2 percent were aged above 65. That meant a surplus of workers to feed China’s low-cost manufacturing boom, which drove the average 10 percent GDP growth seen between 1987 and 2007.

But increased life expectancy and lower fertility means that by 2025, when the share of the 65-and-over population exceeds 14 percent China will officially become an “aged” society. But unlike France, which took 115 years for its share to rise from 7 percent to 14 percent, China will have taken 23 years, and much less than in the United States (60 years), United Kingdom (45 years), and Germany (40 years), according to research by the World Bank and Standard Chartered.

For the economy, this process will principally impact the labor market by reducing the supply of labor, with the work force expected to shrink from 911 million in 2015, to 848.9 million in 2020, and to 781.8 million in 2030, according to Deutsche Bank estimates.

Tighter labor markets will mean higher wages. The Economist Intelligence Unit estimates that average manufacturing labor costs rose 11.9 percent year-on-year (yoy) from 2001 to 2012, and estimates further yoy growth of 12 percent between 2013 and 2020.

As China’s labor force becomes smaller and older, the country’s potential economic growth rate will decline. The IMF’s research into population aging finds that a larger share of older workers in the labor force means lower productivity, but also lower labor force participation, which will ultimately reduce China’s potential economic growth rate by between 0.5 percent and 0.75 percent per year between 2020 and 2050.

This is one factor of many that explains why forecasters like the OECD are expecting China’s growth to slow from 6.6 percent on average between 2011 and 2030 to 2.3 percent per year between 2030 and 2060.

As well as slowing economic growth, China will also have to contend with a huge increase in social security spending to support its growing elderly population.

Pension provision amounts to one of the biggest social expenditure challenges. China does have a pension system, but this only started relatively recently, according to Wynne Wang of CKGSB, which means that current contributors are paying for the elderly now, rather than saving to finance their own retirements.

Closer research shows a mismatch between what is being paid out and what is being paid into state pensions, with researchers Quanbao Jiang, Shucai Yang, and Jesus Sanchez Barricarte finding that 22 of 30 mainland provinces asked for central government help to make up shortfalls totaling RMB 367.12 billion ($53.85 billion) in 2015. Given rising claims on the system as China ages, Hu Jiye, a professor at China University of Political Science and Law, estimates that the government has a future funding gap of RMB 86 trillion ($12.6 trillion).

And this will be further complicated because of a pension provision divide between urban and rural areas. While some, albeit limited, progress has been made in building pension coverage for urban residents, pension provision for rural residents is scant. This represents a huge challenge, particularly as the rural aged population currently numbers some 80 million people, and is expected to number some 125 million, or 21.84 percent of the rural population of 575 million estimated by the UN for 2030.

Aside from providing pensions, it will cost a huge amount to fund healthcare services as China’s population ages. Between 1993 and 2012, healthcare expenditures are estimated to have grown 11.6 percent per year to reach RMB 1 trillion, but standards are still low. Current spending amounts to $420 per capita, compared to a global average of $1,059 per capita, according to World Bank data.

China currently spends 3 percent of GDP on overall health spending, including general care and elderly care, and that number is forecast by the OECD to increase to 5.2 percent of GDP by 2030, which means that total spending will have grown from $230 billion in 2012 to $1.3 trillion by 2030.

And the picture is likely to be even more challenging and costly. An in-depth study by the OECD that cited policy challenges in Beijing showed the need to plan urban spaces specifically with old people in mind, build new social housing, as well as provide education and training to elderly people. Given the multi-faceted range of challenges being brought into view by China’s aging population, its clear that the Chinese government has an unenviable task in front of it.

Encouragingly, the Chinese government appears to be responding by upgrading its industrial base, introducing robotics into its manufacturing sector, raising minimum retirement ages, relocating businesses overseas, and abandoning the one-child policy.

Whether these particular policies, or additional ones to come, can reverse the deeply ingrained aging trend in China’s society is difficult to tell, but I’ll be looking at these policies and their impacts in the coming weeks and months.