China, the second most populous country in the world (which also acted as a catalyst behind the Asian country’s rise as the world’s second largest economy and a manufacturing force), is now witnessing a slowdown.
The country’s population began to decline in 2022 for the first time in 60 years, something which may signal the beginning of a long-term phenomenon that will likely end up affecting the overall business climate and economy.
China’s central bank has now cut its key benchmark lending rate used to price mortgages, as Beijing seeks to boost flagging growth and counter rate hikes in other major economies. Commercial banks can grant more credit at advantageous rates and the move comes at a time when other countries are still weighing upon the thought of relaxing their monetary policies.
China in 2023 recorded one of its worst annual growth rates since 1990, piling more pressure on its post-COVID economic recovery, which is already fighting headwinds like a poorly-performing property sector, soaring unemployment and a global slowdown that has hammered demand for Chinese goods.
Premier Li Qiang stated at the World Economic Forum in Davos on January 16th that the Chinese economy was similar to looking at the Alps, an ‘undulating mountain range’ best appreciated from afar.
As the country’s population fell in 2023 for the second year running, so was its GDP. The population got reduced by 850,000 to 1.4118 billion in 2022 from 1.4126 billion in 2021. The tally may reach 1.313 billion by 2050 and less than 800 million by 2100, according to UN demographic modelling.
The population is ageing quickly; along with the declining birth rate. The national birth rate decreased from 7.52 in 2021 to a record low of 6.77 births per 1,000 people in 2022. By the end of 2022, there were 280.04 million older people in China than there were in 2021 (267.36 million). China’s working-age population, or those between the ages of 16 and 59, fell by 0.5% at the end of 2022, from 62.5% in 2021 to 875.56 million.
Understanding the reason
Blame the country’s one-child policy, which was in play from 1979 until 2015. The policy, which was initially intended to slow down population growth, actually had the opposite effect: fewer babies were born and gender ratios were noticeably out of balance. There are fewer women of childbearing age now. Furthermore, this demographic’s decline may continue and pick up speed due to the growing expenses associated with raising children.
The nation’s rapidly ageing population is another factor. China has seen a notable increase in the number of elderly people in recent decades due to the country’s increased life expectancy. It is anticipated that this trend will continue, with a projected doubling of the population over 65 by 2050.
Government measures
China has released a set of measures to encourage childbirth and support childcare and eldercare, in order to reverse the trend of population decline, and mitigate socioeconomic challenges.
Parents of single-child households have been permitted to have two children since 2013, but Chinese couples have only been permitted to have up to two children since 2016. After that, China declared on May 31, 2021, that couples would now be permitted to have up to three children.
These reforms are backed by tax breaks, childcare leave, and affordable childcare services and education. In addition, local governments have begun to offer monetary incentives to promote childbirth. For instance, subsidies of up to RMB 19,000 ($2,800) are available to Shenzhen couples with one to three children. These subsidies are paid as follows: 10,000 yuan initially, then an additional 3,000 yuan annually until the child turns three.
Numerous other factors, such as high living expenses, changing views on marriage and family among younger generations, and the economic downturn brought on by the COVID-19 pandemic and the nation’s strict containment measures, have all contributed to China’s population decline.
The growth of China’s elderly population has significant ramifications beyond economics. Due to their longer lifespans, elderly parents will need social, emotional, and financial support for a longer period of time. Many of them are dependent only on one child. Given that they must simultaneously care for their own children, support their ageing parents, and manage their careers, this dynamic may put additional strain on the children.
China has also created a range of supportive policies for the eldercare service sector, as well as tax deductions and eldercare leave offered in certain cities, in order to further encourage eldercare. Several policy measures to support the care mechanisms for elders and children were released in 2022 by the National Development and Reform Commission (NDRC). These include tax and fee reductions, financial support, and rent exemptions, among other measures that bring down the costs for care providers.
Why should businesses care?
Previously, a high percentage of the population was of working age, which was known as the “demographic dividend” and drove the nation’s rapid development. China’s labour-intensive, export-driven economic model has made it possible for the nation to move from an agrarian economy to an industrial society with greater income levels and living standards over the past 40 years. However, China’s future labour force and market potential, as well as its path of continuous growth, are all under doubt due to the country’s demographic shift.
The loss of human capital is a direct result of a declining population. This implies that there will be fewer skilled workers, innovators, and entrepreneurs to support the economy and promote future growth. There may be a labour shortage due to the ageing workforce and population decline, which could make it challenging for businesses to find the workers they need to meet demand.
Certain industries are more negatively impacted by the shrinking labour force than others because some businesses depend more on physical labour than others. The manufacturing and construction sectors, for instance, are probably going to be hardest hit by this labour shortage. A decrease of this kind will also raise labour costs, which may make it harder for Chinese businesses to compete internationally.
However, because China already has a sizable labour pool, a severe worker shortage is not anticipated shortly. In 2021, China’s labour force was projected to number approximately 791 million. There are still a lot of underemployed or unemployed workers in some areas.
The most current data available indicates that the unemployment rates in provinces like Jilin, Inner Mongolia, and Tianjin are 61.8%, 61.1%, and 6.0%, respectively. These rates are noticeably higher than the 50.5% national average in 2022. When combined, these facts imply that China might not experience a severe worker shortage in the near future.
Will the market shrink?
The market may get smaller as a result of the ageing population, which will directly affect the size of the market. This could lead to a drop in the demand for goods and services, which could be detrimental to the expansion of businesses in the nation. Because of the “age structure effect,” which holds that younger generations are more likely to spend money than older ones, an ageing society may see a decline in consumer spending.
However, the nation’s economic growth, consumer spending, and companies’ capacity for innovation and adaptation to shifting market conditions are just a few of the variables that affect the market’s size. Positively, fewer people mean higher per capita income, lower unemployment, and higher levels of disposable income—all of which support a robust domestic market.
In the meantime, the Chinese government has invested in higher-value products and used the dual circulation strategy to direct the economy toward its home market. In addition to increasing consumption abroad, more efforts are being made to expand the domestic market because China’s per capita income is roughly six times lower than that of the US. Although China’s GDP per capita is not expected to surpass that of the United States, there is still a great deal of room for growth in terms of household wealth, economic activity, and domestic consumption.