China's looming demographic challenge

China’s National Bureau of Statistics (NBS) dropped a bombshell on 17 January by releasing a record low population growth data of the world’s most populous country. For a country of 1.4 billion people, the overall population increased by merely 480,000 in 2021, putting the national growth rate at 0.34 per thousand. It is the lowest population growth since data as available.

“China’s total population will remain above 1.4 billion for a period of time to come,” said Ning Jizhe, head of NBS and top economic planner of China. He added that the three-child policy is expected to gradually add births, while the national life expectancy is also increasing.

China’s strictly enforced one-child policy started in 1980 and was officially ended in January 2016 in favour of the two-child policy. It whoever failed to boost birth and the two-child restriction was further relaxed to a universal three-child policy, which was passed into law in August 2021.

Outside the policy circle in China, naysayers don’t share the optimistic official stance that China’s population will remain stable. They interpret the record low population growth as a turning point that suggests China’s population may have peaked in 2021 and will very likely start to decline in coming years. 

High housing costs and high education cost are quoted in jest by Chinese netizens as the two major “contraceptives”. Unsurprisingly, the negative correlation between home value and birth rate was corroborated by researchers at Zillow, a US online real estate company. To ease the housing shortfall, China’s Ministry of Housing and Urban-Rural Development announced a plan early this month to add 6.5 million government-subsidised rental homes in 40 key cities to help an estimated 13 million people in need of affordable housing during the 14th Five-Year Plan (2021-2025) period.

The  “double reduction” education reform is also interpreted as a response to the declining population growth. The reform aims to ensure social mobility, easing the academic and financial burdens of both parents and children in schooling. The draconian ban on off-campus tuition for Chinese students has shut 80% of the country’s private  tuition centres  after the policy became effective in July 2021. It also  caused the share price of many listed education companies to plummet ever since.  

A number of China’s outspoken economists have proposed extreme measures to address the deteriorating  situation. Recently, Ren Zeping, former chief economist of China’s beleaguered Evergrande Group and online celebrity, posted an article that urged the People’s Bank of China to print RMB 2 trillion ($314 billion) to support the birth of 50 million babies over the next 10 years. He was banned from Weibo soon afterwards. 

Demographics has serious macroeconomic implications. The world’s factory is exhausting its large pool of surplus rural labour, namely the millions of migrant workers who have played a key role in maintaining low inflation around the globe and supporting China’s extensive growth model in the last three decades. Renowned British economist Charles Goodhart, together with his co-author Manoj Pradhan, argued in their new book The Great Demographic Reversalthat China’s greatest contribution to global growth will soon cease  with its shrinking working age population. The demographic reversal of China will lead to a return of inflation, higher nominal interest rates, lower inequality and higher productivity, but worse fiscal problems, as medical care and pension expenditures will increase in  its ageing society. 

For an economy that has not yet fully transitioned to a high-income innovation-led one, a falling fertility rate exacerbated by an ageing population is double-trouble. In their book, Goodhart and Pradhan also illuminated an economic concept in development economics which connects the population with development -- Lewis turning point. It describes a development situation at which the economy has fully absorbed its surplus rural labour into the manufacturing sector. 

Reaching the Lewis turning point, wages start to increase across the economy, which means the so called “demographic dividend” is over and the economy needs to transition from resource-driven growth based on low-cost labour and cheap capital to growth based on high productivity and innovation. In the transition, argued by James Liang, the chairman of China's largest online booking service provider Trip.com and a renown demographic expert, the age and size of the population, especially of the young segment, is critical for building an innovative economy. Many developing economies cannot make the transition that result in the middle-income trap. A 2013 International Monetary Fund working paper predicts the Lewis point in China to "emerge between 2020 and 2025". That means the Chinese economy is facing an unprecedented challenge to escape the middle-income trap in a looming demographic crisis.