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China’s impending population decline is often cited as a harbinger of its economic and strategic collapse. But while a shrinking population represents a major challenge, the assumption that a country derives its strength from the number of people living within its borders is often overly simplistic.

Indeed, China is facing various demographic issues with wide-ranging implications beyond population decline. The next five years will be critical in addressing these issues, which should be framed as part of an ongoing — and painful — middle-income transition that the Chinese government has determined requires strong central leadership to manage.

Centralization of Power

In October, Xi secured another five-year term as China’s leader, along with a thoroughly loyal cabinet. Since he came to power in 2012, there has been a clear trend of ever-growing power being concentrated in Xi’s hands — moving China away from the rule-by-consensus model established in the 1970s. This shift is a direct response to the various development challenges that China has been late to address, as a strong central government theoretically enables policymakers to be flexible, quick and decisive in addressing ongoing crises, as well as mitigating the societal turmoil that often accompanies middle-income transitions.

Each of the various demographic issues China is facing — which include a shrinking and aging population — would be difficult to overcome individually in a much smaller country, let alone simultaneously and at the unprecedented scale that China is grappling with. This daunting socioeconomic dynamic will, in turn, provide political justification and rationale to double and triple down on centralized power as Beijing prioritizes alleviating China’s various demographic crises through top-down policymaking.

A Hyperexpression of the East Asian Model

China’s meteoric rise was bound to slow. A low-income country implies production potential, and a country can develop from a pre-industrial to a post-industrial society only once, which China accomplished with impressive speed from the 1970s. Reaping the benefits in the form of seemingly boundless economic growth thus must occur within a constrained time frame, which has now run its course.

In many ways, China is experiencing a typical transition of East Asian economies. Japan and the Asian Tigers (i.e., Hong Kong, South Korea, Singapore and Taiwan) underwent similar middle-income transitions. This model involves low-income, high-growth stages leading to middle-income, middle-growth stages that then require reform, innovation and boosted per capita productivity to lead to a high-income, slow-growth stage.

China is broadly attempting to enter into the final stage and escape the so-called middle-income trap — a phenomenon where countries that undergo rapid economic growth are unable to make the final leap to become high-income developed economies after successful low-income to middle-income transition stages. In its effort to avoid this trap, the country is experiencing sweeping structural, cultural and social adjustments that go far beyond population growth (or lack thereof). Indeed, this transition is natural from a socioeconomic and development perspective, regardless of birth rate.

But China faces particularly daunting challenges as it undergoes what is otherwise a typical phenomenon due to its sheer size, unique political and societal implications, and shrinking population. For one, China’s population, geographic size and industrial capacity dwarf all of the aforementioned East Asian economies; taking on the middle-income transition at such a mass scale and under such unwieldy circumstances has never before been attempted.

With the exception of Singapore (due largely to its manageable size), the other three East Asian Tigers (Hong Kong, South Korea and Taiwan) all experienced significant sociopolitical turbulence during their transitions to advanced economies and broadly democratic political systems, including high unemployment, social unrest and political upheaval. Likewise, Japan declined into economic malaise and Indonesia endured mass protests. China, however, is attempting to prevent upheaval typical of the later stages of this transition model while also nurturing economic development (a combination not seen in the other cases), which requires innovative and technologically-driven mass social control and the enforcement of desired cultural mores. This creates an acute risk in China, where people lack an outlet to express their discontent — creating a pressure cooker that could explode into mass civil unrest, like that seen in 1989 (which culminated in the Tiananmen Square massacre) and, more recently, the Nov. 25-27 protests against the government’s strict “zero-COVID” policies.

Then there is the issue of China’s looming demographic decline, as transitioning to an advanced economy with a population and workforce that has already peaked is far more difficult than doing so with a growing population (as was the case in Singapore, Hong Kong, South Korea and Taiwan).

Population Decline and Pronatalism

China’s population has long been expected to peak and start shrinking at some point between 2020 and 2040. But there are signs this decline may have already begun. China’s National Statistics Bureau recorded 10.62 million total births in 2021, down 11.5% from the previous year. Between 2020 and 2021, China’s birth rate also fell from 1.3 children per woman to 1.16 children — far short of the 2.1 replacement level.

These birth statistics are comparable to those China saw in the early 1960s, when the country was experiencing cataclysmic famine brought on by the Great Leap Forward and had half as many people. According to China’s 2020 census, the country’s population count stood at 1,411,778,724 people, though the actual number is likely smaller given Beijing’s tendency to massage national statistics and inflate demographic figures. After years of soft-pedaling or outright denying the issue, in 2017 the Chinese government finally began to acknowledge that the country’s fertility rate was suboptimal and has since become increasingly vocal on the issue, now admitting that population growth has slowed to the point of nearly contracting. But Beijing is acting far too late to reverse the trend, assuming it ever could.

The country’s population decline is compounded by rapid aging. Fewer people of working age (between 15-64 years old) create more retired dependents, reducing state revenues and increasing government expenditures on healthcare and pensions. This cohort of working-age Chinese citizens peaked in 2014 and, according to census data, has been declining at a rate greater than the total population — shrinking by 40 million from 2010-2021. The share of retired dependents, meanwhile, is skyrocketing.

A decreasing population, particularly among the working-age cohort, risks dragging economic growth in the absence of significantly increased per capita productivity. According to the data analytics firm CEIC, China’s growth in productivity per capita (where productivity outpaces labor force decline) is still outpacing the United States, but has been declining since 2010.

Additionally, increased labor costs in China — already twice that of neighboring Vietnam — will drive low-margin, labor-intensive manufacturing out of the country into markets with labor abundance. This, however, is partly purposeful given low-end labor moves overseas in developed economies. Nearby countries with cheaper labor (like Bangladesh, India or Vietnam) also can’t match China’s logistics and infrastructure, which will help mitigate this manufacturing exodus.

In response to its shrinking population, China has adopted pronatalist policies, ending its One Child Policy and Two-Child Policy and introducing the Three Child Policy in 2021. The country has also pledged to make pre- and postnatal services and fertility treatment more effective, affordable and accessible. Over the past decade, childhood education has emerged as a key government focus and is now widely available across the country. Local governments enacted subsidy programs for new parents and extended maternity leave. In wealthier regions, new mothers are now entitled to up to 158 days off, up from the 98-day statutory minimum established in 2012. This minimum maternity leave is on par with Japan and is higher than those set by several developed countries, such as Sweden and South Korea (which mandate at least 84 days of leave for new mothers). China also has the highest abortion rate among the world’s largest economies, at nearly 50 abortions per 1,000 women aged 15-49 (compared with 12 in the United States and five in Japan). China is taking measures to curb abortions for non-medical purposes, including sex-selective abortions, and more restrictions are likely as Beijing seeks to boost its population rate.

However, these pronatalist policies have so far failed to increase China’s birth rate. Indeed, there are few historical examples of sustained fertility growth in any country once it has dropped. In reality, China’s society is rapidly evolving along the track of other industrialized Asian nations and the global north in general. Marriage rates are declining and divorce rates are increasing — especially in the country’s highly urbanized coastal and eastern cities — amid a general deterioration of traditional social norms.

More couples are also choosing not to have children, and those that are starting families are waiting longer to do so. This is due to several factors. For one, the high cost of housing and education has made child-rearing too expensive for many; according to the Chinese think-tank YuWa Population Research, the average total cost of raising a child in China is nearly seven times per capita GDP (compared with four times in the United States). China’s insufficient social safety net is also deterring people from having children.

The notorious One Child Policy is often cited as the catalyst for China’s shrinking fertility rates. But the ban on having large families may have, ironically, not been necessary to contain China’s population growth, as the effects of the country’s industrialization in recent decades — including urbanization, broad access to education, and women joining the workforce — would have likely naturally slowed fertility rates.

However, population growth is not inherently advantageous. If economic outputs cannot keep pace, resources will become scarce and expensive. Such a predicament led the Chinese government to institute the One Child Policy in the first place, to control overpopulation and increase the standard of living. Growth in terms of per capita GDP can outpace total GDP growth, which is an indicator of greater individual wealth and higher individual productivity. China does not, then, necessarily need to rely on population growth for a stable economic trajectory. At nearly one billion people, China’s working-age population still dwarfs every other country (for comparison, the U.S. working-age population is 215 million, while Japan’s is 74 million).

Instead, China will look to manage a strategic demographic contraction by reorienting its economic fundamentals. This, however, will prove to be a major challenge as such economic fundamentals are encapsulated in retirement and social security, real estate and capital, labor, geography, and broader regional and geopolitical developments — all of which will be explored in the subsequent parts of this series.

Source: Stratfor Dec. 19, 2022 | By Nate Fischler