The demographic risks to China’s long-term economic outlook
24 Jan 11
Emerging markets are widely regarded as key to the future growth of the world economy - and in this regard, no emerging market is deemed to be more important than China. Over the past three decades, China has grown at a more rapid tempo than any country in history - and expectations are high, both in China and internationally, for a continuation of extremely rapid Chinese economic growth over the coming decades. Such assessments do not take China’s dramatically changing demographic outlook into account. Over the past generation, China’s demographics abetted the country’s remarkable economic rise. In the generation ahead, by contrast, China’s economic performance will be constrained by a multiplicity of demographic factors, including declining manpower availability, rapid population ageing, and dramatic changes in family structure. These demographic pressures do not preclude continuing economic progress for China in the years ahead. Attention to demographic risk, however, suggests that China’s future pace of growth may be considerably slower than Beijing’s leadership (and many international investors) currently assume.
China’s economic transformation over the past three decades is arguably the single most dramatic event in the annals of modern global development. Between 1979 (the year after the Chinese Communist Party embraced “reform” under Deng Xiaoping) and 2009, by the reckoning of the World Bank, China’s GDP grew 17-fold: that is to say, at an average of 10% per year. No country in history - not even redoubtable “Little Dragons” like Singapore or Taiwan - has ever before managed to sustain such a high rate of growth for such a long time. (China’s international economic accomplishments over this same period were scarcely less breathtaking: in nominal dollar terms, the country’s merchandise exports were 100 times greater in 2009 than 1979.)
Given China’s sheer size, this extraordinary performance has perforce shifted the world economy’s centre of gravity. By 2009, China overtook Germany as the largest in global exporter of goods - and in 2010, it breezed past Japan to claim title to the world’s second largest GDP (behind only the USA - at least for now).
Can China’s dizzying, historically unprecedented, pace of economic growth continue on into the future? Many well informed decision makers the world over are confident that it can. Not least important, Beijing’s own leadership subscribes to this view: Chinese authorities project another quadrupling of GDP by the year 2030. Outside China, many financial and corporate chieftains are equally effusive about China’s economic prospects. Some experts, indeed, argue that Beijing’s forecast is too modest: Nobel Economics Laureate Robert W. Fogel, for example, has argued that China may well grow at a per capita tempo of 8% per annum between until 2040 - at which time, by his reckoning, per capita income in China would be over twice as high as in Western Europe’s EU-15 .
Are such expectations realistic? It is always risky to envision the future as a linear extrapolation of trends from the recent past - and perhaps especially so for a country whose recent record of economic success has been so clearly exceptional. One obvious and hardly trivial problem with such optimistic extrapolations is that they do not seem to take demographic fundamentals into account.
Over the past generation, China’s population trends broadly abetted the nation’s economic rise; but China’s demographic future promises to be very different - and far more troublesome. Indeed, China will have to weather a veritable demographic tempest in the years immediately ahead. New, powerful and previously unfamiliar demographic forces are now gathering in China, and will buffet the country simultaneously. China is confronting the demographic version of “the perfect storm”. Impressive as China’s economic accomplishments over the past generation have been, these new demographic realities may ultimately force us to revise today’s received wisdom about the future of China’s economic growth.
China’s population profile in 2030: A snapshot whose outlines can already be seen
Surprising as it may sound, we already have a reasonably clear picture of China’s population picture 20 years hence. This is so, quite simply, because the overwhelming majority (roughly 80%) of the people who will inhabit China in the year 2030 are already alive, living there today. We can already tell that China’s future demographic profile will differ strikingly from its current population situation. This coming transformation is the inevitable, and by now inexorable, consequence of a revolution in childbearing patterns that has already taken place.
Traditionally, of course, China was a high-fertility society - and it remained one during the first several decades of Communist rule. This is no longer the case. There are some inconsistencies in and questions about official Chinese data on births and childbearing. Notwithstanding these uncertainties, population specialists believe that China became a sub-replacement fertility society about two decades ago - and that birth rates have fallen far below the replacement level since then. The US Census Bureau, for example, believes that China’s current total fertility rate (or TFR, a measure of births per woman per lifetime) is now down to about 1.5 - which is to say, lower than in many Western European countries today, and over 30% below the level required for long-term population stability . In much of China, moreover, fertility levels fall well below this national average: for urban China as a whole, TFRs hover around 1.2 (45% below replacement), and in China’s major metropolitan centres, like Shanghai and Beijing, they are reportedly 1.0 or lower (well under half the replacement rate).
Persistent, and now extreme, sub-replacement fertility is in fact the primary demographic driver shaping the China of tomorrow, and it portends a future that will be quite unlike anything in the recent past. China’s population grew steadily during over the decades just completed; by contrast, given current trends, Census Bureau projections anticipate a peaking of total Chinese population in 2026 - just 15 years from now - and a continuing national depopulation thereafter.
To get a visual impression of the scope and scale of China’s impending demographic changes, we can contrast China’s current (2010) population profile with its projected profile for 2030 in Figure 1 . By these projections, China’s total population two decades from now would be barely larger than today’s (increasing by just 4% between 2010 and 2030). However, the composition of China’s population would be markedly different from today’s. In this future China, there would be fewer people under the age of 50 than in China today - and far fewer Chinese in their 20s and early 30s. On the other hand, there would be many more elderly Chinese than today - vastly more, in fact, in their 60s, 70s and 80s.
This profound shift in China’s population profile has four major economic and social implications for the years immediately ahead.
1. The shrinking - and greying - of the Chinese labour force
The first is the end of labour force growth. Over the past three decades of hyper-rapid development in China (1980-2010), the country’s working age population (15-64 years of age) rose by over two-thirds - growing by an average of about 1.8% a year. Over those same years, China’s working age population shot up from 60% to 72% of total population. During this period, China enjoyed what economic demographers sometimes call a “demographic dividend” - a confluence of trends that not only facilitated economic growth through an increasing availability of labour inputs but also (by dint of sharply dropping dependence ratios) through potentially large increases in savings rates, and thus capital investment.
By now, however, China’s “demographic dividend” has been cashed. From 2010 onward, the fraction of China’s total population comprised by men and women of working age is set to decline more or less indefinitely (or at least, as far as a demographer’s eye can see). Further, the absolute growth of China’s working age population promises to be negative between 2010 and 2030 (see Figure 2) . By US Census Bureau projections, China’s working age manpower is set to peak in 2016 - just 5 years from now; by 2030, it stands to be shrinking by almost 1% a year.
China’s manpower pool will not only be shrinking over the next two decades: it will also be ageing, and rapidly. In modern societies, younger workers tend to have the highest levels of educational attainment and to possess the most up-to-date knowhow and training: qualities propitious for improvements in workforce productivity. Unfortunately, China’s cohort of men and women in their 20s is set to shrink in size by over 75 million, or almost 35%, between 2010 and 2030, to go by Census Bureau projections. On the other hand, the oldest working age cohort - the pool of men and women in the 55-64 group - is projected to grow by over 60%, or 80 million, over those same years. Today, China’s manpower pool has over 3 prospective young workers (ages 20-29) for every 2 of their older counterparts (55-64 years of age); twenty years from now, that ratio will be inverted. China’s older manpower, remember, is much less educated than their more youthful successors: today nearly half of today’s 50-64 grouping has not completed primary school. Though educational attainment for older Chinese will improve in the years ahead, they will remain the least educated stratum of the Chinese manpower pool - but they will account for a steadily increasing share of the working age population. With a smaller and much greyer Chinese workforce on the horizon, sustaining the growth rates of the recent past could be an increasingly counterintuitive proposition.
2. China’s coming senior tsunami
Then there is the broader issue of rapid and pervasive population ageing. Though Chinese authorities may have clamped down on births for three decades, the country will be experiencing a population explosion of senior citizens over the next twenty years (progeny of the pre-population control era). In 2010, about 115 million Chinese were 65 or older; by 2030, the corresponding number is projected to approach 240 million - meaning that China’s cohort of senior citizens would be soaring at an average rate of 3.7% per year. Over just those twenty years, the fraction of Chinese 65 or older is set to double - from 8.6% to 17.2% (see Figure 3) .
The trajectory of population aging that China can expect to experience over the next two decades is virtually unprecedented in human history to date - until now, only Japan has undergone such a rapid tempo of greying. However, Japan was rich before it grew old - and China will have to do things the other way around. When Japan registered the same percentage of 65+ population that China does today, its per capita income level was well over twice as high as China’s is now (see Figure 4) . Today and in the future, China will confront pervasive population aging on much lower income levels than Western economies, or newly industrialized Asian economies like Taiwan and South Korea, have relied upon in meeting those challenges. By 2030, according to Census Bureau projections, China’s median age (the age-line that bisects the population into two equally sized groups) will be higher than the USA’s. One need not be a Sino-pessimist to expect China’s per capita income to be only a fraction of America’s years from now.
To complicate the ageing outlook still further, China is a country of vast regional disparities. As fate would have it, China’s very poorest regions - in the countryside - are already generally also its greyest, since younger rural men and women have been moving to the cities for better-paying jobs. (Roughly speaking, income levels in the Chinese countryside are only a third as high as in China’s cities.) In the years ahead, China is set to experience an ever growing divergence in age profiles between city and countryside, with rural areas ageing even more rapidly than the country as a whole. According to projections by Chinese demographers, over 22% of rural China’s population will be 65 or older by 2030 (see Figure 5) . (By way of comparison: in aged Italy and Germany - Western Europe’s greyest countries - the 65+ group still accounts for less than 21% of total population. Today’s income disparity between Germany and rural China may be on the order of a factor of 15.)
How China’s coming tidal wave of senior citizens (many of whom will be extremely poor, despite the country’s economic progress) are to be supported remains an unanswered question. As yet, China has no national public pension system in place. The country’s existing limited patchwork arrangement of pension systems, which cover only a small fraction of the country’s workforce (mainly privileged employees from cities and state owned enterprises) are shockingly underfunded from an actuarial standpoint, making a comprehensive national pension reform all the more difficult. As for health care, only the most rudimentary of public provisions are available in rural areas. Without wholesale overhaul of the country’s old age support policies, the burden of providing for China’s growing senior burden is set to fall on their families’ ever-shrinking numbers of adult children. (Confucian tradition and strict current laws against parental abandonment notwithstanding, it is not self-evident in the decades ahead that all Chinese charged with the obligation to take care of their parents will be willing or capable of accepting it.) Suffice it to say that, irrespective of the arrangements ultimately devised for the support of the country’s elderly, meeting the needs of China’s rapidly growing senior population will almost certainly place economic and social pressures on China that no country of a comparable income level has ever before had to face.
3. China’s growing army of unmarriageable males
At the moment, China embraces a norm of universal marriage - and over the past generation, almost all adult men and women have been able to expect that they would eventually find a spouse and have children. In the decades immediately ahead, however, China will see the emergence of a growing host of essentially unmarriageable young men. This outcome will be the inescapable arithmetic consequence of the gender imbalance that has accompanied the country’s “One Child Policy”.
While ordinary human populations regularly and predictably report 103 to 105 baby boys for every 100 baby girls, China’s officially reported sex ratio at birth (or SRB) has risen steadily, and eerily, during the era of the “One Child Policy”, and was almost 120 boys for every 100 girls by 2005 (see Table 1) . This imbalance between the numbers of little boys and little girls in China has set the stage for a “marriage squeeze” of monumental proportions in the decades just ahead.
Calculations by Chinese researchers suggest the dimensions of the social dislocation that may await (see Figure 6) . In the year 2000, all but 5% of Chinese men in their late 30s had managed to get married; by 2030, their projections suggest that the corresponding proportion of never-married men in their late 30s may be over 25% nationwide. (Those same projections suggest the levels will be even higher in the Chinese countryside by 2030 - well over 30% for rural men in their late 30s and early 40s - since the poor, uneducated and the rural will be more likely to lose out in the coming competition for brides.)
In contemporary Europe, to be sure, many younger people today are ending up both unmarried and childless - but as a result of personal preferences and voluntary choices. China, by contrast, faces the prospect of a mass phenomenon of involuntary bachelorhood and childlessness - this in a Confucian culture that has long stressed the primacy of the son’s filial and ancestral duty to continue the family lineage. (In addition to this matter of cultural dissonance, a growing cadre of childless Chinese men will beg the practical issue of old age support in a society where the rural elderly are largely the responsibility of their own sons or daughters.)
How will China fare with a growing army of unmarriageable, underprivileged, and quite possibly deeply discontented young men in its midst? It is impossible to know for know: but it is difficult to see how this could prove a plus for either economic performance or social cohesion.
4. The rise of a “kin-less” family structure
Finally, China faces the prospect of truly revolutionary changes in family structure, especially in its ultra-low fertility urban areas. A “new family type” is in the making in China today: only-children begotten of only-children.
In China’s cities, according to estimates and projections Chinese researchers, a large minority of young adults are themselves single children already: as of 2011, the fraction of urban adults of childbearing age (25-49) with no siblings is placed at 24%--almost a quarter of the total cohort. By 2025, in these projections, only children would become the majority of urban China’s population of childbearing age - and by 2030, it could account for almost three-fifths (see Table 2) . (Only-children of childbearing age is now, and will likely remain, a quintessentially urban phenomenon in China, owing to the especially low fertility levels that prevail in Chinese cities; according to projections, adult only-children will continue to be atypical and relatively uncommon in the countryside in the decades ahead.)
Given the projected preponderance of only-children of childbearing age in the years just ahead, and the evident preference today of urban Chinese for hyper-low fertility, the “new family type” could possibly become a common, if not predominant, family structure in China’s cities within a generation. The children in this new family type would have no siblings; no cousins; no uncles or aunts - only ancestors and descendants.
The emergence of this new family type could have truly far-reaching implications for China - including implications for economic performance. Until now, after all, China has been a “low-trust” society; given the risky environment in which business must take place, people have relied heavily upon trusted social networks (guanxi), largely composed of blood relatives. In China’s most important economic centres, however, the kinship networks that have lowered the risks and transaction costs of business are rapidly eroding.
Unless China can come up with serviceable institutional substitutes - and quickly - economic performance in China may be adversely affected by this rapid transformation of the urban Chinese family.
Demographic change: An un-priced source of risk for China’s economic future
When all is said and done, China still has many potential sources for enhancing productivity in the years immediately ahead. These include: migration of rural workers to more productive urban jobs; wider application of as yet underutilized technical know-how; improved financial intermediation for the country’s famously high savings rates; and broader institutional and policy reforms to enhance economic efficiency. Given such still-untapped potential, it is perfectly reasonable to argue that China will enjoy continuing growth in the years immediately ahead.
However, given the confluence of serious demographic challenges that China now faces - problems that are not generally as yet appreciated, apparently even by Beijing’s leadership - China’s growth over the next two decades could be slower than is generally expected today: and possibly, even much slower.
China’s troublesome demographic trends over the decades immediately ahead, moreover, are by now essentially immutable. Manpower availability trends through the late 2020s, for example, are already basically set because the 15-64 population of 2026 is already alive today. Similarly, all of China’s prospective senior citizens in 2030 are already alive: they are today’s cohorts of Chinese men and women in their mid-40s and older. China’s prospective brides and grooms in 2030 are the children of today - whose numbers reflect a huge imbalance between boys and girls. And so on. Chinese policy may attempt to mitigate the impact of these demographic realities, but it cannot change them.
Surprisingly, the demographic risks to China’s development prospects remain largely unexamined and “un-priced” by policy-makers, financial markets, and business concerns, both within China and abroad. I say “surprisingly” because China’s prospective demographic evolution is relatively predictable, in contrast with so many of the other “unknowns” that policy, finance, and business circles must cope with as the contemplate the future.
Factoring demographic risk into assessments of China’s long-term economic prospects will help everyone - Chinese and Western alike - avoid unpleasant “surprises” in their expectations about the future, and form more realistic expectations to guide their decisions in policy and commerce. That should be all to the good for everyone.
 Robert W. Fogel, “Capitalism and Democracy in 2040: Forecasts and Speculations”, NBER Working Paper 13184 (June 2007).
 China’s coercive population control program is surely responsible for some of this drop-off, but hardly all of it: in urban areas, as we note above, fertility today may average just 1.2 births per woman, and in places like Beijing and Shanghai, women are having less than one birth per lifetime - fewer, in other words, than China’s restrictive policies would actually allow. In fact, many Chinese demographers today suspect that the country might not even return to replacement fertility if the “One Child Policy” were entirely scrapped. For some indications that China’s current low levels of fertility reflect in part changes in prevailing norms concerning childbearing, see Yong Cai, “China’s Below-Replacement Fertility: Government Policy or Socio-Economic Development?”, Population and Development Review, vol.36, no. 3 (September 2010), pp. 419-440.
 Source: US Census Bureau International Data Base, http://www.census.gov/ipc/www/idb/informationGateway.php, January 2011
 Sources: 1970-2005-Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2008 Revision, http://esa.un.org/unpp, Wednesday, May 13, 2009; 2:12:34 PM. Note: “medium variant” projections; 2010-2030--US Census Bureau International Data Base, http://www.census.gov/ipc/www/idb/informationGateway.php January 2011
 Sources: 1990-2005--Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2008 Revision, http://esa.un.org/unpp, Monday, July 26, 2010; 2:27:42 PM. “Medium variant” projections; 2010-2030--US Census Bureau International Data Base, http://www.census.gov/ipc/www/idb/informationGateway.php January 2011
 Source: Zeng Yi, Zhenglian Wang, Jiang Leiwen, and Danan Gu. 2008. “Projection of Family Households and Elderly Living Arrangement in the Context of Rapid Population Aging in China --A Demographic Window of Opportunity Until 2030 and Serious Challenges Thereafter.” GENUS - An International Journal of Demography, vol 54 no. 1-2 (2008), pp. 9-36
 Note: Taiwan data are from 1980-2005 only. Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2006 Revision and World Urbanization Prospects: The 2005 Revision, Monday, January 26, 2009; 3:31:49 PM; Angus Maddison, “Per Capita GDP PPP (in 1990 Geary-Khamis dollars),” Historical Statistics for the World Economy: 1-2006 AD, table 3, http://www.ggdc.net/maddison/ (accessed January 27, 2009). Taiwan Population: Statistical Yearbook of the Republic of China (Taiwan), “Table 10. Age-specific distribution of population, dependency ratio,index of aging and median age”, available at http://eng.dgbas.gov.tw/lp.asp?CtNode=2351&CtUnit=1072&BaseDSD=36.
 For some background on this skewing of the gender ratio, a phenomenon not confined to China, see “Gendercide: The worldwide war on baby girls”, The Economist, March 4, 2010, available electronically at http://www.economist.com/node/15636231?story_id=15636231,
 Some demographers suggest the official numbers may slightly exaggerate the disparity, but there is no doubt that the disparity has been rising for a generation, and is extraordinarily high today. See for example Daniel M. Goodkind, “Fertility, Child Underreporting, and Sex Ratios in China: A Closer Look at the Current Consensus”, Demography (forthcoming). Table 1: Source: Lavely, William. First Impressions of the 2000 Census of China. Available electronically at http://csde.washington.edu/downloads/01-13.pdf, accessed 10/15/02. Unpublished data, Chinese Academy of Social Sciences, Institute for Population and Labor Economics, 2008.
 Zeng Yi, Zhenglian Wang, Jiang Leiwen, and Danan Gu. 2008. “Projection of Family Households and Elderly Living Arrangement in the Context of Rapid Population Aging in China --A Demographic Window of Opportunity Until 2030 and Serious Challenges Thereafter.” GENUS - An International Journal of Demography, vol. 54 no. 1-2 (2008), pp. 9-36.
 Source: Guo Zhigang, Liu Jintang, Song Jian, “Birth policy and family structure in the future,” Chinese Journal of Population Science 2002(1): 1-11.
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