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28 April 2023

China’s Ageing Population

China is facing a significant demographic shift as its population ages rapidly. The National Bureau of Statistics announced a fall of 850,000 in 2022 to 1.4bn, making it the first decrease in the country’s overall population in six decades as a result of falling birth rates and an ageing population. The shift is expected to have a profound impact on the country’s economy, as a shrinking working age population and a growing elderly population may slow down economic growth, increase labour costs, and strain public finances.
 
The decline has likely been heavily impacted by the one-child policy imposed by Beijing in 1980. The policy was designed to slow down the rate of population growth, reduce the strain on resources and improve the overall quality of life in China. The Chinese government strictly enforced punishments which aimed to restrict the uncontrollable growth rates despite anti-policy protests, as many argued that the government should not have had the power to dictate how many children a family should have. Consequently, the implementation led to an imbalance, with families preferring to have boys over girls, resulting in the practice of sex-selective abortion and abandonment of female children.

However, over time, the Chinese government recognised the negative consequences of the one-child policy and began to relax it. In 2016, the government announced that the one-child policy would be replaced with a two-child policy, allowing families to have two children if one parent is an only child. In 2021, the government announced that it would further relax the policy and allow families to have up to three children following China’s 2020 census which indicated that the fertility rate was lower than required for a stable population.
 
One of the biggest long-term impacts of such strict policies, and one that we are seeing now, is a shrinking workforce. As the population ages, the number of people at work is declining and thus reducing the supply of labour within the economy. This trend looks set to continue with the number of working age people projected to decline by 23% by 2050, meaning there will be fewer entrepreneurs, innovators, and skilled workers to fuel the economy and spur further economic growth, which could pose a challenge for businesses, as they try to find workers with the necessary skills and qualifications to replace those who retire.
 
Another impact of an ageing population is the direct effect on China’s healthcare system and social welfare framework, which are facing increasing pressure to meet the healthcare needs of the elderly. Many analysts are largely in agreement that the country’s social welfare and medical infrastructure is, and continues to be, underprepared for its ageing population, with reforms expected of its inefficient and unequal healthcare system. That being said, the government has recognised the issues and more recently prioritised investment, after the COVID-19 pandemic exposed gaps in the system, and the country’s ageing population only adds more pressure to improve service provisions.

A further and possibly more significant problem for the country is in the form of pensions. As the population has aged, the number of people in retirement is expected to reach 300m by 2025. With much of the Chinese population concerned that the state pension funds, alongside urban and rural worker pension funds, which make up nearly 80% of China’s pensions, may run dry by 2035. This comes as the gap between contributions and outlays are predicted to be as high as 10tn yuan (US$1.6tn) by 2050, with each retiree to be supported by one worker’s contribution, down from two currently. This causes a concern amongst the population, especially younger people, that China’s state pension system looks to be financially unsustainable and highlights a major challenge for the government after four decades of restrictions on births. Problems could emerge due to the imbalance between rural and urban areas. While the pension system covers both urban and rural residents, the benefits available to these groups are not equal. Rural residents typically receive lower pensions than urban residents, which can create social and economic disparities.
 
However, the country’s pension problem is just one aspect of a broader set of demographic challenges that the country is facing, including a declining birth rate and a shrinking workforce. It is not all doom and gloom though, as the Chinese government has recognised the issue and is working to address it through a range of reforms, but it will take time to see the full impact of these changes. While increased funding within the healthcare sector will be important, addressing the pension problem will be critical to the long-term sustainability of China’s economy and its ability to compete in the global marketplace.

This article was taken from the February 2023 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
China’s Ageing Population

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