Demographic crisis is hitting China’s economy

On May 11, the much-anticipated results of China’s seventh national census were finally released, after repeated retouching and deliberate embellishment by Chinese Communist Party experts. Although many netizens questioned the authenticity of the data, it is an indisputable fact that China has fallen into a low fertility trap, and that the demographic dividend has disappeared before it gets rich.

Population growth is slowing down and China’s total fertility rate has fallen below the warning line

Since 2011, the Chinese Communist Party’s family planning policy has been reversed from controlling births to encouraging them, but women’s willingness to have children has never returned, and the expected fertility boom has fallen short again and again. China’s total fertility rate (i.e., the average number of children per woman) has fallen from a peak of 6 to the current 1.3, which is the lowest fertility level in the world and much lower than typical low-fertility countries such as Japan and Southern Europe.

In demography, a total fertility rate of about 2.1 is called the replacement level fertility rate, which means that a couple should have an average of 2 children to ensure a normal population replacement level, so that the total population of the next generation does not increase or decrease. The “low fertility trap” theory suggests that when the total fertility rate falls to 1.5, it will fall further and it will become more difficult to raise the fertility rate again.

In fact, China has been in an era of low fertility levels since 1992, when the intrinsic rate of population growth has shifted from positive to negative, with 150 million fewer births in 30 years. It is expected that within the next decade, the inertia of positive population growth will be exhausted and the total population will start to enter a negative growth trajectory in the period 2025-2030. This will accelerate the shift from the incremental market to the stock market, especially with the emergence of the “421” family (i.e., four elderly people, one couple and one child), which will result in a significant contraction and imbalance in housing demand in some Chinese cities.

Statistics also show that in 2019, China will have 14.65 million births for the year, with a birth rate of 10.48 per thousand, the lowest birth rate since 1949; 9.98 million deaths for the year 2019, with a population mortality rate of 7.14 per thousand; and a natural population growth rate of 3.34 per thousand. 11.73 million newborns in 2020, which, despite suspected logical errors , is still down 2.65 million, or 18%, from the previous year, a horrific historical record. As you know, the number of university enrollments in 2020 is 9,674,500, and if the new student population drops below 10 million, universities will soon face the dilemma of having no one to recruit.

China is aging before it gets rich, and is starting to enter a deeply aging society

The international standard for an aging society is to have 10% of the population aged 60 or older, or 7% of the population aged 65 or older. China started to enter the aging society since 2000.

According to the data of the 5th National Census, the proportion of the population aged 60 and above is 10.33%, among which the proportion of the population aged 65 and above is 6.96%. And the results of the seventh national census show that the population aged 60 and above in China is 264 million, accounting for 18.70%, of which, 190 million people aged 65 and above, accounting for 13.50%. The aging of the population has further deepened.

In terms of development trend, the population aged 65 and above will enter a deeply aging society with a proportion of more than 14% in 2022, and a super aging society with a proportion of more than 20% around 2033, and will continue to rise rapidly afterwards. Although aging is a common global phenomenon with the downward trend of fertility rate and longer life expectancy, China is aging at an unprecedented rate due to the long-term artificial implementation of family planning. The most direct result of the aging population is that the contradiction between social security income and expenditure will become more and more prominent, and the pension gap will increase.

In fact, China’s urban workers’ pension insurance fund has been experiencing a significant funding gap since 2015, and the funding gap is gradually expanding. In 2020 alone, the pension funds of some provinces have already exceeded their expenditures, including seven provinces including Hebei, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Hubei, and Qinghai. At present, these provinces or some cities are not enough funds are transferred from developed areas, either cinching the food, or digging flesh to fill the sore.

What’s more, the current source of pensions is the pension social security supplied by the work of the young people of today, and in the future, the elderly population is growing, while the working population becomes smaller and smaller, the overall supply and demand of funds will certainly not reach a balance. This is especially true since the mainland’s GDP per capita has only just passed $10,000 and 98.99 million rural poor people have just declared their so-called escape from poverty.

The article “China Pension Actuarial Report 2019-2050” says that over the next 30 years, the current balance of the basic pension insurance fund for urban employees nationwide will begin to dive faster and faster after barely maintaining a positive number for a few years, with the deficit growing larger and larger, and will exhaust the accumulated balance by 2035. According to the article, if the retirement age is 60 years old, the earliest group of post-80s will only be 55 years old in 2035, without reaching the retirement age. In other words, the post-80s are likely to become the first generation without pensions.

China is the world’s most populous country, and also the country with the fastest growing aging population. By the end of the 14th Five-Year Plan, with the declining birth rate and increasing life expectancy over the past few decades, the aging process will further deepen, and aging before wealth will become the most serious test and challenge for China’s economy in the next 30 years.

China will lose its status as the “world factory” as the demographic dividend disappears

The rapid decline of the fertility rate of a country’s population will cause the acceleration of population aging, while the proportion of child rearing will decline rapidly and the proportion of working-age population will increase, and before the proportion of elderly population reaches a high level, a “golden period” will be formed when labor resources are relatively abundant and the burden of rearing is light, which is very favorable for economic development. Economists call this the “demographic dividend”.

China’s false economic boom in recent decades at the expense of future generations has been called the “miracle” of the world by some foreign scholars. When discussing why China has been able to create a “miracle” of economic growth, many believe that the influence of the “demographic dividend” is a crucial reason. It is the abundance and low cost of labor that has made China the world’s factory and the engine of growth for the world economy.

However, new census data show that China’s aging process has accelerated significantly, with the number and proportion of working-age people aged 15-59 both declining. The working-age population is 63.35% of the total population, a 6.79 percentage point plunge from 10 years ago, while the population aged 60 or older accounts for 18.70%, a 5.44 percentage point increase from 10 years ago. Although China’s total labor force is close to 900 million, the labor force has declined significantly, and the number of migrant workers has dropped by more than 30 million.

As the working-age population decreases, many companies are having difficulty finding suitable employees, and overall labor costs continue to rise. At the same time, the generally low quality of the rural labor force is also limiting the extent to which the demographic dividend can be realized. Due to the huge number of mobile population in rural areas, it will cause a higher degree of aging in rural areas than in cities in the future. It is also a big problem to establish a pension security system that takes into account the state, collective and individual characteristics of rural areas while improving the urban pension security system.

On April 28, the Financial Times reported that the imminent deep aging, the closing of the demographic dividend window, and the rising costs of land, raw materials, shipping and logistics are pushing Chinese manufacturing companies into a new situation.

Counter-globalization and the new pneumonia epidemic have prompted developed countries such as Europe, the United States and Japan to re-examine the global layout of their industrial chains, and have introduced subsidies to encourage companies to relocate manufacturing back to China. China’s position as the “factory of the world” is increasingly challenged by Southeast Asian countries such as Thailand, the Philippines, Vietnam, Indonesia, Laos, Cambodia and Myanmar, and even South American countries led by Mexico.

In late March, Li Yizhong, a former minister of industry and information technology, warned that China’s manufacturing sector had fallen from 32.5 percent of GDP in 2006 to about 27 percent in 2019, a serious situation that should be taken seriously. A number of scholars said that the decline in the share of manufacturing industry will not only drag down the current economic growth and affect urban employment, but also bring about hidden industrial security risks and weaken the risk resistance and international competitiveness of China’s economy. Japan’s Daiwa Securities has predicted that China will lose its status as the “world factory” by 2022 at the latest.

Interestingly, high property prices have become the best contraceptive, leading to the imminent cutting of all the leeks in the property market. So just on the day the results of the seventh national census were announced, four departments, including the Ministry of Finance of the Communist Party of China, the Budget Work Committee of the Standing Committee of the National People’s Congress, the Ministry of Housing and Urban-Rural Development, and the General Administration of Taxation, held a symposium in Beijing on the pilot real estate tax reform. On the one hand, this is to better control the rate of housing price increase, and also to give continued blood supply to pension funds after land finance becomes unsustainable.