China Hits the Demographic Great Wall
 
To understand what will happen in the future, one needs to both identify trends and interpret accurately. That seems self-evident, and yet China’s leaders failed so them spectacularly at interpreting trends that the country’s economy is now facing a self-inflicted catastrophe.

China’s labor force is shrinking just when it needs more people to fuel its growth, and its population is aging so rapidly that the United Nations predicts that the percentage of China’s population aged 60 and older will triple (from 16.8 percent to 45.4 percent) by 2050. Even sooner than that, in 2030, the number of workers for every retiree will drop to two-to-one, from five-to-one today.
 
Let’s go back to see how this happened. China’s fertility rate - the average number of children born to a woman during her lifetime - reached its peak at 6.2 in 1965. Fears that China’s population would grow so fast that the country would run out of food were stoked by the 1972 publication of a Club of Rome report called Limits to Growth.1

As a recent article in Scientific American explains, “According to Shanghai Academy of Social Sciences economist Liang Zhongtang, who participated in debates about the policy’s adoption, the findings of Limits to Growth - though widely criticized elsewhere - swayed some of the decisions in China.2 Indeed, one influential proponent of the policy, Soviet-trained missile scientist Song Jian, applied theoretical methods borrowed from European mathematicians to generate wild population growth projections for China that helped sway leaders. . .”

In 1980, to prevent overpopulation, Chinese leader Deng Xiaoping imposed the notorious one-child rule on China’s families. Xiaoping saw a trend in population growth, combined it with bad information, and reached the conclusion that reducing the number of mouths to feed would lead to economic prosperity.

For the next 35 years, China harshly enforced the one-child rule, leading to forced sterilizations, loss of jobs and heavy fines for parents who broke the rule, and hundreds of millions of abortions according to the Chinese government’s own statistics. As a result, China’s fertility rate has fallen to somewhere between 1.2 and 1.6, depending on which source you believe. That is far less than the 2.1 “replacement rate” that is needed to keep a population from declining.3

Because of Chinese parents’ preference for sons (who are more likely to support them in their old age), untold numbers of baby girls were aborted after their gender was identified through ultrasound. Another 85,000 children, nearly all of them girls, were adopted by Americans, according to the U.S. State Department.

The result is an alarming gender imbalance of 116 boys born for every 100 girls in China. There are now 34 million more men than women, according to official Chinese statistics, although outside estimates are as high as 51.5 million.4

This imbalance will only become worse with each passing year. Between 2030 and 2045, 20 percent of the male population will be unable to find wives. This reality is expected to lead to increases in social unrest, sex trafficking, rape, drug and alcohol abuse, and violence.
 
At the same time, China’s workforce - the seemingly endless supply of cheap labor that fuels its factories - is waning. China’s National Bureau of Statistics reported that China’s working age population - people between the ages of 16 and 59 - dropped by 3.7 million in 2014. That follows declines of 2.4 million in 2013 and 3.4 million in 2012, though it should be noted that the 2012 figure included fifteen-year-olds.

So, over the most recent three-year period, China’s workforce has gone down by 9.5 million people. For comparison, Walmart is the largest civilian employer in the United States. According to its website, Walmart’s U.S. workforce totals 1.3 million. China has lost 7.3 times that many workers over the past three years.

As the Chinese labor pool shrinks, the supply of labor can’t keep up with the demand, which leads to higher labor costs that erase the low-cost manufacturing advantage that drove China’s economic growth over the past thirty years. In 2014, disposable incomes of Chinese workers went up an average of about 10 percent. Not coincidentally, China’s growth rate of 7.4 was its lowest in 25 years. For 2015, analysts expect the growth rate to fall even lower, below 7 percent, according to Reuters.5
 
All of this, of course, was utterly predictable. If, say, 50 million fewer babies are born this year than last year, we know that, aside from other factors like immigration, the number of people entering the workforce eighteen years later will drop by roughly the same number.

Compounding China’s blunder is the realization that, if the goal was to reduce the number of births, no intervention was necessary. At the time that the policy was enacted, China’s population was already growing slower, and would have slowed further without any interference from the government. China’s fertility rate had fallen on its own to 2.7 by 1980.

Today, in several other Asian countries, the fertility rate has dropped just as much as China’s without a government-imposed limit on births, as their populations have moved to cities and become more affluent over the past few decades. Japan’s fertility rate is 1.4. In South Korea it is 1.3, in Taiwan 1.1, and in Hong Kong 1.2.6

In a desperate attempt to reinvigorate its economy by reversing the decline in its workforce, China’s government has announced that parents will be allowed to have two children starting in March 2016.

Based on this trend, we offer the following forecasts:

First, China’s abandonment of its one-child policy will not reverse the plunge in its birth rate or by extension the catastrophic decline in its working-age population.

One reason is that the gender imbalance mentioned earlier will keep China from succeeding in stabilizing its population; tens of millions of men won’t be able to find a woman to marry. Another reason is that most married couples simply can’t afford to have more children. As Bloomberg Business reports, the average cost to raise a child in China is $3,475 per year, or 43 percent of average household income.7 Consider that when China relaxed the one-child rule in 2013 to allow families in which either parent was an only child to have second baby, only 30,000 families in Beijing (or a mere 6.7 percent of those eligible) applied to have a second child by early 2015. The fact is that the urbanization of China’s population has led to this outcome. Living in tiny apartments and toiling in factories, parents no longer have the incentive to have multiple children that they did when they worked on farms and needed help with chores. Now that the option has been extended to every family, it’s unlikely that enough parents will choose to have an expensive second child. Even if a family could somehow afford to have three or four children, that option is not available. Even after the recent reform, China will allow parents to have two children, but no more. The bottom line is that revising its misguided policy will not be enough to get China out of a demographic mess of its own making.

Second, while China’s birth rate continues to decline, it will be surpassed by India as the country with the most population by 2025.

By 2030, India - thanks to its fertility rate of 2.5 - will have 1 billion people of working age, versus about 800 million for China. India’s median age in 2030 will be 37, while China’s will be 46.8 Based on these demographic advantages, India offers better opportunities for American companies and investors than China over the next two decades, and it is better positioned than China to emerge as an economic power by the middle of the century.

Third, as its labor force shrinks, China will be forced to make heavy investments in technology to automate its factories.

Low-end manufacturing will shift to younger countries like Bangladesh, India, Vietnam, Indonesia, and the Philippines as Chinese wages rise. The only way for China to reignite its economic growth will be by increasing productivity through innovation, as we will explore in our next trend this month, How China Will Shape Global Innovation.

References
1. Limits to Growth by Donella H. Meadows is published by Signet Publishing. ⓒ 1972 Donella H. Meadows. All rights reserved.

2. Scientific American, November 2, 2015, “China’s New Birth Rule Can’t Restore Missing Women and Fix a Population,” by Mara Hvistendahl. ⓒ 2015 Scientific American, a division of Nature America, Inc. All rights reserved.

http://www.scientificamerican.com/article/china-s-new-birth-rule-can-t-restore-missing-women-and-fix-a-population/

3. World Affairs, May/June 2015, “Shrinking China: A Demographic Crisis,” by Gordon G. Chang. ⓒ 2015 American Peace Society. All rights reserved.

http://www.worldaffairsjournal.org/article/shrinking-china-demographic-crisis

4. iBid.

5. Reuters, October 25, 2015, “China Premier Says 7 Percent Growth Goal Never Set in Stone,” by Ben Blanchard. ⓒ 2015 Thomson Reuters. All rights reserved.

http://www.reuters.com/article/us-china-economy-idUSKCN0SJ02K20151025-O1OmZrX5OCZLOI3r.97

6. Scientific American, November 2, 2015, “China’s New Birth Rule Can’t Restore Missing Women and Fix a Population,” by Mara Hvistendahl. ⓒ 2015 Scientific American, a division of Nature America, Inc. All rights reserved.

http://www.scientificamerican.com/article/china-s-new-birth-rule-can-t-restore-missing-women-and-fix-a-population/

7. BloombergBusiness, August 21, 2014, “China Baby Boom Wagers Go Bust on Child Cost Burden,” by Weiyi Lim. ⓒ 2014 Bloomberg L.P. All rights reserved.

http://www.bloomberg.com/news/articles/2014-08-20/china-baby-boom-wagers-go-bust-on-child-cost-burden

8. Scientific American, November 2, 2015, “China’s New Birth Rule Can’t Restore Missing Women and Fix a Population,” by Mara Hvistendahl. ⓒ 2015 Scientific American, a division of Nature America, Inc. All rights reserved.

http://www.scientificamerican.com/article/china-s-new-birth-rule-can-t-restore-missing-women-and-fix-a-population/