Finance & Economics

China’s Demographic Situation Causes Economic Headwinds

China’s economic system, which is the second largest in the world, is currently in some sense struggling to recover amid a prolonged downturn in the local real estate sector and after a difficult period of the coronavirus pandemic, but this is not the whole list of problems on the path to the positive dynamic of growth, which can be significantly complicated by the demographic shift.

China's Demographic Situation Causes Economic Headwinds

Nowadays, the population changes in the mentioned Asian country are being carried out in the direction of decreasing the corresponding indicator. In the long term, this tendency will become a negative impact factor on the condition of the Chinese economy. The most obvious potential consequences of the demographic shift are shrinking labor force numbers and increasing pressure on fiscal policy.

Darren Tay, head of Asia country risk at BMI Country Risk & Industry Analysis, said during a conversation with media representatives that the Chinese working-age population will decrease so rapidly over the next decade that the local economy will have to face a slowdown in gross domestic product growth of 1% per year. According to the expert, the mentioned tendency will be observed over the next 10 years. This point of view is based on the results of an analysis of world population data published by the United Nations.

The Economist Intelligence Unit warns that the financial difficulties emerging against the background of an aging population are urgent and cause for concern. In this context, it is noted that the components of economic growth are factors such as productivity, labor costs, and capital accumulation.

The Economist Intelligence Unit also underlined that in the context of demographic shift as a source of impact on the economic situation, raising the retirement age is one of the few viable options for maintaining a long-term financial balance.

If the retirement age in China is raised to 65 by 2035, the pension budget shortfall may decrease by 20%. Also, as part of the relevant decision, the net pension received in an Asian country may increase by 30%. The implementation of this scenario involves easing the burden for both the government and households.

It is worth noting that the demographic shift is not a reality specific only to China. Currently, the decline in the birth rate is a global trend. In many countries of the world, women prefer to have children later or not at all.

Data from the Organization for Economic Cooperation and Development show that the birth rate in the OECD countries, the richest states in the world, has decreased from about 3.3 children per woman in 1960 to about 1.5 children per woman in 2022. It is worth noting that to maintain a constant population in the absence of migration, an indicator of 2.1 children per woman is needed.

Data from the National Bureau of Statistics of China indicate that in 2023, the population of the Asian country amounted to 1.409 billion people. This indicator is 2.08 million less than the figure for 2022. The corresponding downward trajectory has been observed in China for two years in a row. In 2022, the population of the Asian country decreased by 850,000 people.

China’s population is expected to step down to 1.317 billion by 2050. By 2100, according to preliminary forecasts, the corresponding figure will be 732 million people.

Erica Tay, director of macro research at Maybank, says that the current demographic dynamic in China is a consequence of the one-child policy set in place in the 1980s.

Tianchen Xu, a senior economist at The Economist Intelligence Unit, says that the pace of decline in China’s fertility exceeds the average rate typical for Asia. For example, in South Korea and Japan, the intensity of the corresponding process is more moderate. According to the expert, there is a rapid aging of the population in the three mentioned countries.

Tianchen Xu notes that the welfare system in China is lagging in the context of its compliance with realities. Also, according to the expert, financial support for childbearing in an Asian country is quite low by international standards.

Tianchen Xu separately noted that the Chinese government has largely proved unable to cope with rising housing prices. This indicator also has a certain impact on fertility. People may postpone the birth of children at a later date or completely abandon the realization of this intention due to lack of housing.

Tianchen Xu underlined that the rapid economic growth seen in developed countries in recent decades has increased income levels and expanded educational and career opportunities for women. According to the expert, the improvement in conditions has increased the costs associated with the birth of children. Tianchen Xu says that in more developed societies, parents face high costs of raising children, which is a deterrent to their birth.

Separately, the expert drew attention to the fact that in Asian countries there is a kind of overtime practice. This work culture is especially characteristic of East and Southeast Asia. In the respective countries, the working day is the longest in the world. Against this background, employees have little time to start a family.

Experts say that Chinese politicians should take measures to improve working conditions. Tianchen Xu says that appropriate measures should include stricter compliance with labor laws and ensuring a work-life balance.

As we have reported earlier, China Faces Risks Amid Bond Market Bubble.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.