September 21st, 2016

China lacks the wherewithal to adjust to demographic decline

by Brendan O’Reilly China faces an intractable and protracted demographic […]

Team AEC

China faces an intractable and protracted demographic crisis driven by millions of individual family planning choices made by its increasingly wealthy and urbanized population. Policies restricting births imposed by the authorities have played only a contributing role in the drama. Similar aging trends can be seen throughout East Asia, especially in Japan, Taiwan and Hong Kong – territories that never had the types of legal restrictions imposed upon mainland Chinese couples.

The gist of China’s problem is that it’s population is set to age and shrink before it has had a chance to become rich. With the shrinkage expected to begin within a decade, there will be a huge impact upon China’s economic and social structure. If the giant nation’s policies and social attitudes are not adjusted sufficiently fast to soften the crisis’ impact, dangerous instability may follow.

Declining fertility

In 2015, following a quarter-century of falling birth rates, China’s one-child policy has been scrapped and now all couples are allowed to have two children. However, this relaxation will not reverse the process of the population’s graying and shrinking. The one-child policy limited urban residents of the Han ethnic majority to having only one child – although most rural residents, who make up roughly half of the population, and ethnic minorities, who account for 9 percent of China’s 1.3 billion people, were allowed up to two children.

The birth restrictions were imposed in 1979 and have contributed to a precipitous decline in China’s total fertility rate (TFR: the average number of children that would be born per woman during her reproductive life) from around 3.0 in the late 1970s to an estimated 1.22 in 2000, according to census data. Both researchers and Chinese officials note, however, that unauthorized births are underreported and that actual fertility levels are higher than those derived from recorded births. Once appropriate statistical adjustments are made, China’s current TFR is most likely in the range of 1.4 to 1.6 – still far below replacement level.

China is not alone. Demographic decline is happening throughout East Asia; Japan, South Korea and Taiwan, have significantly lower fertility rates than mainland China. Hong Kong and Macau have some of the lowest fertility rates in the world, driven entirely by the reproductive choices of their residents. Women are increasingly choosing to focus on their careers and forego marriage. Furthermore, raising children in Asia has become an expensive proposition.

But China stands out in East Asia because it looks into the abyss of a demographic decline from a position of relative economic underdevelopment. In nominal terms, average incomes of China’s East Asian neighbors are three to five times higher than those in mainland China. As a result, China still does not have the economic resources and social infrastructure that are necessary to deal with a rapidly aging population.

The country benefited from a “demographic dividend” during the three decades beginning in 1980 – a period that coincided with rapid economic growth. The (now waning) growth in the Chinese population stemmed from prolonged life expectancy and the ripple effects of the large cohorts born in the 1960s, 1970s and 1980s. As a result, there was an ample pool of young people working, settling down and buying goods during the period of China’s explosive economic liberalization.

Gender imbalance

As China has urbanized, raising a child has become a hefty financial burden. New three-bedroom apartments in China’s large cities sell for between $80,000 and $200,000, compared to average monthly incomes for urban families that range from roughly $1,000 to $2,000. The tremendous pressure on children to perform well in the test-based education system has led to massive spending on test-preparation classes outside of school, with some parents admitting that they spend as much as $2,500 a month on extra tuition. There is also the issue of “face,” as Chinese parents and grandparents weigh their offspring’s academic success on the scales of family prestige.

Historically, many Chinese couples in rural areas sought to have as many children as possible – as providers of economic security for their parents in old age. Also, male children were particularly valued in the patriarchal society. These cultural factors, coupled with compulsory one-child restrictions, illegal but widely available prenatal gender screenings and unlimited access to abortion, all have led to a skewed gender ratio. In 2014, 115.9 boys were born per 100 girls; the natural human ratio is around 105 boys to every 100 girls. Despite longer life expectancy for women, there are now 33 million more males than females in China.

The complexity of modern Chinese’s attitudes towards childbearing are further illustrated by abnormally low rates of breastfeeding. According to WHO statistics, only 16 percent of urban Chinese mothers and 30 percent of mothers in rural areas exclusively breast-feed their newborns for the first six months, a significant rate drop from a generation ago. This phenomenon exists despite widespread fears over the safety of locally manufactured infant formula, justified by previous scandals. The Chinese market for infant formula has grown to more than $20 billion annually, most of it imports.

China’s population is set to peak at 1.38 billion in 2023, before declining to 1.26 billion by the mid-century. By then, more than a quarter of Chinese will be over 65, compared to roughly nine percent today. The UN forecasts that the total Chinese population will shrink to 940 million by the end of this century.

Softening the blow

There is no feasible way to reverse this demographic trend, but a more gradual, managed decline remains a possibility. World Bank figures show a slight increase in China’s fertility, from estimated 1.3 in 2004 to 1.5 a decade later. Also, China’s gender imbalance at birth is less pronounced than it was a decade ago. The lifting of the one child restrictions will encourage more traditional couples to have girls – assuming that they already have male heirs. Furthermore, there is now a general public and official awareness of the dangers of an aging, shrinking population. The authorities have recently made it easier for China’s tens of millions of undocumented people – most of whom were born in violation of family restriction policies – to receive identity cards.

Politicians can make some difference. During the 1950s and 1960s, Chinese couples responded to officials’ calls to procreate as much as possible. More recently, countries such as France have successfully used incentives to boost average fertility. French couples receive education benefits and paid vacations after children are born. The TFR in France is now 2.0 (a notch under replacement fertility rate for developed nations), up from an alarming 1.7 in 1993.

Social barriers

However, most population growth in France stems from immigration. Could this mechanism help China? It currently hosts some 900,000 legal migrants and untold numbers of illegals, most of them factory workers from Vietnam. Also, desperate Chinese bachelors, unable to find Chinese mates because of the gender imbalance, are increasingly marrying Cambodian or Vietnamese women. Unlike East Asian neighbors such as Korea and Japan, China features a degree of linguistic and cultural diversity. In theory, all this opens up the potential for integrating immigrants, especially those from more economically underdeveloped nations in Southeast Asia. However, any inbound migration is almost certain to be dwarfed by significant outflow of Chinese nationals to richer countries.

The current government policies will not arrest China’s demographic decline. The personal choices ofthe urbanized population, reinforced by the effects of a generation of propaganda promoting single-child families, appear to be the primary drivers of China’s low fertility rates. In both political and social spheres, human beings in China are still viewed as a burden, not a resource.

SCENARIOS: Too little, too late

In consequence, a precipitous decline in China’s population is the most likely long-term outcome. Policies and social trends that influence demographics take several generations to have their full effect. The current relaxation of family size restrictions is simply too little, too late. Before the policy was completely abolished in 2013, the Chinese government relaxed the one-child policy by allowing 11 million couples in which both spouses had no siblings to have two children. However, by May 2015, only 18 percent of eligible couples had taken advantage of the opportunity. This shows to what extent China’s declining fertility is driven by personal considerations, as opposed to public policies.

In October 2015, the country’s National Health and Family Planning Commission estimated that some 90 million families would qualify for the new, two-child policy. By the end of the year, however, only two million families had applied for permission to have a second child. China Daily conducted a survey in 2016 which showed that nearly 60 percent of working mothers do not want a second child, citing time and energy needed to raise it. Other concerns of the women included career risks, the pain of childbirth and little faith in their marriages. Additionally, there is a persistent official view in China that the country needs a smaller population for environmental, social and political reasons.

The aging of the population will have destabilizing effects, especially as the number of those older than 65 rises from the roughly 10 percent now to a 25 percent by mid-century. That will put an enormous strain on the country’s wobbly social security system. Many Chinese families will face the “4-2-1 problem”: after two generations of single children, tens of millions of working-age couples will face the burden of having to help support four elderly dependents alongside their child. The imbalance between the older and younger generations will become more severe with time, unless more Chinese couples decide to have more children – soon.

Bleak economic outlook

China’s run of high economic growth has been heavily dependent on export-oriented manufacturing and infrastructure buildup, largely driven by increasing urban populations. While China’s major cities will continue to grow for many decades, rural areas will face demographic decline, a trend already evident in Japan. Much of China’s massive, debt-driven investment in rural infrastructure will be wasted. As the ranks of workers in industrial regions will decline, wages will rise –accelerating the already existing shift of labor-intensive manufacturing to countries with a younger, cheap workforce, particularly to India. A dark scenario of demographic decline sparking a negative feedback loop of economic crisis, political instability, emigration and further decreased fertility is very real for China.

However, a population shrinkage will not necessarily lead to economic, social and political collapse if the tensions are effectively managed. Japan’s population will age and shrink more rapidly and more immediately than China’s; 26 percent of Japanese are already over 65, and that group will comprise 40 percent of society by 2060. Although China will have a smaller per capita economic base with which to take on such a challenge, it will have more time to prepare for it. Also, Beijing can learn from Japan’s experience. It shows that technological advances in automation, for example, help manage the transition to a gray society more efficiently.

Mitigating factors

Several factors could mitigate the decline of China’s population. The easing of family planning restrictions, for example, although less effective than hoped, points to officials’ willingness to shift the narrative on demographic challenges. There remain policy levers that the Chinese government could move to encourage higher fertility rates, especially in poor rural areas. These could include scrapping all existing restrictions and fines on having more than two children and repealing the remaining government incentives to encourage smaller families. Top positions in government and state-owned enterprises, for example, remain reserved for people with no children, or only one child. Large swathes of China’s culturally conservative, rural population, where fertility rates remain higher than average, would still choose to have two, three, or more children, helping to rebalance the choices of young urban workers having one child or no children at all.

Many of the factors that presently motivate young individuals to delay marriage and have fewer children would lose their bite in a less-crowded China. Shrinking numbers of students, for example, should weaken the intense educational and economic competition. Cheaper housing could prompt urbanites to marry younger and opt for more offspring.

Tardy reaction

However, even if moderated by such factors, demography’s impact on the current Chinese economy will be dramatic. China will no longer be able to depend on its population for rapid growth driven by exports and infrastructure. Technology, education and innovation are now vital for the country to move forward. The increasingly wealthy, educated and urbanized Chinese population can create significant opportunities in the service sector.

The real question is whether or not China’s leaders will be able to stop interfering in the reproductive choices of the population. The country’s strong culture of government control will be difficult to overcome. In demographic matters, altered social attitudes and improved policies need decades to take full effect. By the time Beijing officials appreciate the need to change their approach, it may be too late.

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Source: Geopolitical Intelligence Services