Will demographics cause China to slow down?

Will demographics cause China to slow down?

Since the Third Plenum, China has been preoccupied with ongoing changes to its demographics. As much of Asia’s miracle growth has been attributed to demographics, changes to the composition of China’s population are cause for concern.

The Ministry of Human Resources and Social Security of the People’s Republic of China released data indicating just how big the pressure is going to be on those who are part of the work force – as average ages are increasing, and non-contributing retirees suddenly become a larger part of society.

One Child Policy

An important change announced at China’s Third Plenum was with regard to family planning. The Chinese Communist Party (CCP) promised to reverse aspects of its controversial 1980 one child policy. These changes were first proposed with a fearful eye on the labour force. The party predicts a shortage in the labour force – expecting to lose 67 million workers between 2010 and 2030 – and statistics reflect an increase in China’s ageing population, so the CCP has recommended a change.

The new proposal would allow families in which one parent comes from a one-child home to have two children. With the exception of ethnic minorities, rural families without boys and those who have a disabled child, permission to have a second child is currently only given if both parents come from one-child families. However, following years of migration from the countryside to the city, migration rates are finally declining, as the villages no longer have an abundant source of young and strong labour. China has finally hit Arther Lewis’s turning point, at which a developing country can no longer rely on an abundant rural labour source to provide cheap labour to the cities.

The decision to have a second child is a difficult one. Local media has reported that these new policies will not immediately be implemented, and many Chinese families living in first tier cities have indicated that they do not necessarily want to have two children, because they do not have the financial resources to do so.

Raising a child in China has become incredibly expensive, as the costs of education keep increasing. As the initial excitement over the proposed change wears off, the financial worries are setting in. On top of expensive tuition fees, housing prices in areas with the best schools are off the charts, and ensuring childrens’ entry into schools often involves expensive bribes.

Pension Schemes

On top of this, changes to China’s pension scheme have also gained a lot of attention in the international as well as national media. China’s pension system has separate regulations for urban and rural residents, as well as those working for state-owned enterprises (SOEs) and those working for private companies. While SOE employees have a stable state pension, those working for private companies are contributing large amounts of money to their plans. Many living in the countryside are unable to afford these plans, so all aspects of care towards the end of their life will fall upon their children.

Given that local governments individually oversee pension funds, there is an extremely unequal divide between different provinces. Richer provinces are hesitant to allow funds to be transferred nationally, as they are scared to lose their say within the system and their abundant funds. On top of this, pension funds’ growth slowed by over 70% in 2012, causing concern for a population that is already rapidly ageing.

Moreover, the number of people contributing to the urban pension fund rose by 7% to 214 million in 2012, compared to a 9.5% increase in the number of retirees to 69 million. As welfare spending is set to increase, earlier indicated changes in the one child policy are expected to ease the decline in the labour force. However, there will be a delay as changes to the one child policy will take a while to implement, and there will be another 20-year gap until these babies have grown up and are able to contribute to society.

China has also said it will launch a 401K-style tax-deferred pension investment scheme in January 2014. This plan is also hoped to boost stock and bond market performance, as new funds will enter China’s capital markets. Up until now, China’s pension investment has been in low-risk and low-return government bonds. This will not only allow for faster growth of pension funds, but it will also boost China’s capital markets, with a predicted additional $49 billion being invested.

Categories: Asia Pacific, Politics

About Author

Margaux Schreurs

Margaux lives in Beijing and works as an editor at a Beijing-based magazine and website, and writes on a freelance basis for a wide range of publications throughout the world, mainly focusing on East and Southeast Asian current affairs. She is a London School of Economics and Political Science MSc graduate.