What happened

The Chinese National Bureau of Statistics announced that the Chinese population dropped again in 2023 after it had already declined in 2022. The population drop in 2023 amounted to 2.08 million, after China already had to cede the status as the world’s most populous country to India in mid-2023.

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The shrinking population indicates that the Chinese government’s efforts to reverse the one-child policy have not been effective. After already replacing it with a two-child policy in 2015, the Chinese government announced a three-child policy in 2021. None of these policy changes have had the desired impact of significantly raising fertility levels, let alone reversing the trend of population decline.

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There are two major reasons for this. Firstly, increasingly well-educated women do not want to have as many children anymore. Like elsewhere, life decisions have changed. Secondly, the costs of living and of raising children particularly in urban China have significantly increased. This also leads to couples making the conscious choice of having fewer children because it is becoming harder to afford large families.

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All this stands in stark contrast to the Chinese government’s efforts at encouraging women to stay at home and focus more on family duties. None of these efforts have born fruit so far.

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Why it matters

A shrinking population is going to cause significant pain to China’s social security systems. So far, China does not have a totally comprehensive pension or health insurance system that covers all citizens equally and independently of where they live. While the Chinese government made significant progress in the last years in improving social security, an aging population will put a significant burden on this system and any potential future improvements. A shrinking working-age population will have to support pensions and other social security measures for a growing older population.

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A shrinking working-age and overall aging population will also impact the structure and prospects for China’s economic growth. Increased reliance on pensions and social security systems will further increase the share of government spending as part of the GDP. This means that China’s attempted shift to economic growth driven by consumer spending will become even more difficult. Potentially further increased personal savings of Chinese citizens to mitigate shortfalls in state-funded social security systems and pensions can further dampen the ability of consumer spending to drive Chinese economic growth. This is already an issue because, in international comparison, China has high savings quotas.

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Furthermore, the shrinking Chinese population will lead to a shortage in the available workforce in the country. While this issue might at first sight not seem to be overly pressing in a country the size of China, the potential economic impacts are huge. The times of abundant cheap labour that has fuelled China’s economic growth in the past are definitely over. China will have to refocus its economic growth model towards less labour-intensive and higher-value production. While this is already well under way, future changes to China’s growth model and maintenance of economic growth are likely to be more challenging in times of a shrinking workforce, still relatively weak domestic consumption and state finances that are under pressure from higher burdens in the social security system.

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What to take away

There are two main points to take away from this announcement and for the future of the Chinese economy.

Firstly, the downward trend in Chinese population numbers is unlikely to change any time soon. Well-educated women, who have already made the choice of prioritising their careers over having multiple children are unlikely to revisit their decisions. This is an issue that most developing countries witnessing declining populations are wrestling with.

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Additionally, the cost of living issues and the costs associated with raising children in China can be expected to remain high so that couples are unlikely to reverse their decision to have fewer children. Particularly in urban areas, there is no reason to assume that the cost factor of raising children will ease significantly in the near future.

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Closely related to the cost-of-living issue is the fact that youth unemployment in China remains high. In June 2023, the Bureau of Statistics reported a youth unemployment rate of 21.3%. After publishing this all-time-high figure, it stopped publishing data and then re-issued a new figure only in December 2023, after allegedly revising the methodology of gathering data. The newly released figure in December only stood at 14.9% although this change may well be due to the changes in data collection methods.

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For the issue of population growth, the high youth unemployment rate means that a generation of young people are more likely to have fewer children or entirely hold back on having a family. High youth unemployment creates economic insecurity for young people. If and when they eventually managed to find a job, they at least initially are likely to have other priorities than having multiple children to stop the overall shrinking of the population.

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The second takeaway concerns the changing structure of the domestic Chinese market. An aging population has different interests and needs in terms of goods and services. As Zhang Shixin, deputy secretary-general of China’s National Development and Reform Commission indicated, the Chinese government sees huge economic potential in what Zhang termed the ‘silver economy’. This does, for example, include accommodation, tourism and health care, who are required to develop targeted products for the elderly. Additionally, it also includes a growing market for assistance devices. While the shrinking population is likely to cause economic pain in some areas, it also indicates a shift in market demands within China that offers potentially significant growth potential.

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