The Incredible Shrinking Dragon: China’s Demographic Shifts and the World’s Economic Woes
Updated: Jun 10
“The world's most populous country has hit a historic turning point.”
There is one resource China has always had enough of, the human resource. China has always been known for its massive population size. It's home to 1.41 billion people. That means nearly one out of every five human beings on Earth lives in China. For the first time since 1961, that figure is declining. China's population has declined for the first time in more than 60 years, according to China's National Bureau of Statistics. The population in 2022 was just over 1.4 billion, a drop of 850,000 from a year prior. The recent announcement of a decline in the Chinese population after many years is significant as it signals the conclusion of a period characterized by swift growth and easily accessible low-cost labour. The precarious situation puts at risk China's position as the leading producer of affordable goods worldwide and the accompanying economic prosperity.
Decoding the Chinese Population Conundrum
Over time, China's population has experienced a decline due to its growth and policies. Presently, the country is aiming to change its trajectory in order to maintain a stable population. The problem is, it might be too late. In the 1950s, under Mao, China experienced one of the most gruesome famines on record. 30 million people died. At the same time, the birth rate dropped causing the population to shrink. But, as often happens with wars, famines, and other major crises immediately after, there was a baby boom. Combined with global medical advances that decreased infant mortality rates, the birth rate had skyrocketed which the government saw as a big problem. And in 1980, they implemented the extreme one-child policy which limited most families to one child. China implemented the one-child policy, citing concerns about the unsustainable growth of its population. The policy imposed hefty fines on most couples who had more than one child and forced millions of Chinese women to have abortions. As a result, many families showed a preference for boys, leading to an abundance of single men in the population due to baby girls being aborted or abandoned at birth. But, China had accomplished its goal. Population growth was under control. However, China soon came to the realization that these stringent policies had been remarkably effective, perhaps even to an excessive extent.
Source: United Nations, DESA, Population Division, World Population Prospects 2022
To bring the fertility rate up, in 2016 and 2021, China made revisions to its one-child policy, allowing couples to have two and three children, respectively. However, despite these changes, it appears that many younger adults are not inclined to comply with the policy and increase their family size. China's fertility rate remains one of the lowest globally, and in 2020 it reached a historic low of 1.28.
Although China relaxed its family size restrictions, experts in demographics argued that this change came too late to affect the country's population trajectory. Furthermore, the government's attempts to encourage a baby boom and resolve the demographic crisis have not succeeded in reversing the trend of falling birth rates.
Impact on the Global Economy
Over the last 25 years, China has embedded itself into the global supply chains. This was felt acutely, right out of the COVID pandemic, particularly as vaccines were rolled out and consumer spending boomed. There were bottlenecks at ports, and semiconductor chip shortages as inputs to automobiles. The integrated success of globalization has now become a threat to the resilience of global supply chains. Due to its long-standing reliance on manufacturing, China greatly benefited from the availability of inexpensive labour, which facilitated its economic expansion. That's why it became the world's manufacturing floor. That is why China serves as the manufacturing hub for your iPhones, cars, and solar panels. And that's why we've all paid relatively cheaper costs for it. An unlimited supply of cheap labour from rural China is the engine of China's exports. Now, if we switch that off, China's cheap labour-based manufacturers will soon kind of decline.
Over time, a scarcity of factory labourers in China caused by an increasingly educated workforce and a diminishing population of young individuals could lead to higher costs for customers outside China, potentially exacerbating inflation in nations such as the United States that depend heavily on imported Chinese products. As a result of rising labour expenses in China, numerous businesses have already begun relocating their manufacturing operations to nations with lower pay scales, such as Vietnam and Mexico.
Moreover, a declining population in China could result in reduced spending from Chinese consumers, putting global brands reliant on the sale of goods to China at risk, from Apple's smartphones to Nike's sneakers. Ultimately, a shortage of factory workers could drive up expenses for consumers outside China. The era of cheap goods manufactured in China is about to come to an end.
China became a major world economy nearly overnight but it's still a middle-income country.
Many, particularly those living in rural areas, have not experienced substantial benefits from China's economic growth. China is yet to develop the necessary safety nets to support its ageing population. To build the social infrastructure like the social programs in health care and in pensions. It takes time. And that's getting actually tougher with the economy that's slowing down.
A slower economy will inevitably redefine China's role in the world as a manufacturing superpower. What this means for China, for the world is that the resource constraints from within would also constrain Chinese ambition and its global reach. In some ways, China isn't alone. A lot of Asian and European countries are experiencing population declines, too. What makes China different is how fast this all has happened.
A reduction in the workforce wouldn't only negatively impact China's economy, but it would also have consequences for the US and Europe. The manufacturing sector in China, for instance, would likely encounter difficulties in maintaining its recent growth momentum. Consequently, China's economy, which has previously buoyed global growth rates, would not have the same effect in the future decades. Furthermore, there is a possibility that productivity growth in the country could come to a halt. Economists have long observed a link between population density and innovation, with a larger population resulting in a larger pool of potential entrepreneurs.
The labour population decline is not a theoretical danger, but one with tangible effects. Companies are already encountering significant obstacles in filling their vacant positions, particularly in crucial industries such as healthcare and education. As time passes, many more sectors and fields will encounter difficulties in locating employees in both China and the Western world. A shortage of train drivers, teachers, engineers, doctors, firefighters, nurses, and programmers will have long-term ramifications. As firms have fewer employees, they will produce or perform less, leading to reduced sales, less economic growth, and ultimately, less prosperity for everyone. This issue is even more severe in China, and if nations do not take steps to reverse the trend, the problem will only intensify, potentially resulting in catastrophic economic consequences.
Thus, a declining population would indicate that China's potential to disrupt markets might decrease. All of these factors considered, China's decelerating economy could have significant knock-on consequences for the rest of the world.
Opportunities for India
China's shrinking population presents a unique opportunity for India in several ways. Here are some potential areas where India could benefit:
Manufacturing: With a shrinking workforce in China, manufacturing costs are likely to increase, making it more expensive to produce goods in China. This presents an opportunity for India to attract foreign investment and become a hub for manufacturing, particularly in labour-intensive industries.
The effects of India's population surge will go beyond services and encompass goods bearing the "Made in India" label as well. India has become a significant hub for low-value industries that are shifting away from China, particularly mobile phone manufacturers, and the supply chains of global brands like Samsung, Apple, Oppo, Vivo, Xiaomi, Lenovo, etc. Apple, in particular, plans to move parts of its manufacturing process out of China, and India is set to be one of the beneficiaries of that shift. South Korean tech giant Samsung has established the world's largest mobile phone factory in India. As India’s manufacturing base expands, so will its exports.
Services: With an ageing population and fewer young people, there may be a growing demand in China for services such as healthcare and eldercare. India has a well-developed services sector and could potentially become a provider of these services to China.
Tourism: With the growing middle class in China, there is likely to be an increasing demand for travel and tourism. India has a rich cultural heritage and diverse natural beauty that could be attractive to Chinese tourists.
Technology: China has been a leader in technology development, particularly in areas such as artificial intelligence, robotics, and 5G. With a shrinking population, China may need to rely more on international collaboration to continue to innovate. India has a strong technology industry and could potentially partner with China in these areas.
Overall, India has the potential to benefit from China's shrinking population by becoming a more attractive destination for investment, services, tourism, and technology partnerships. However, India also faces significant challenges such as infrastructure deficits, regulatory barriers, and geopolitical tensions that could restrict India from reaping the demographic dividend. And in that sense, of course, there are still fundamental differences between China and India. In many ways, India still has a lot of ground to gain.
Source : World Population Prospects(2022), United Nations
Despite the Chinese government's attempts to tackle the demographic crisis by incentivizing a baby boom through measures such as cash handouts and relaxing the one-child policy to allow for three children, birth rates continue to decline. The trend is being fueled by educated Chinese women who are opting to delay marriage and forgo having children due to the prohibitive costs of housing and education. Additionally, China has been hesitant to ease immigration restrictions to replenish its dwindling workforce, as it historically issues relatively few green cards. As a result, the country has been outsourcing low-skilled manufacturing to other Asian nations and embracing automation in its factories to address the labour shortage, with hopes of relying more on artificial intelligence and technology sectors for future growth. It was only 40 years ago that China started leveraging its booming population to become an economic superpower all while still trying to stem population growth. Now that China's population growth is officially over, China may have to rethink its future not just as a global superpower but for its citizens at home too.
Nandini Nagpal is an analyst at IFSA Hansraj
Nysna Khurana is a junior analyst at IFSA Hansraj
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