The Dispatch Podcast - China's Demographic Decline

Episode Date: January 21, 2023

China’s population is getting older and older and analysts warn this could have significant global impact. Deputy Morning Editor of TMD Esther Eaton sits down with Scott Kennedy of the Center for Strategic and International Studies to dig into the root causes behind the country’s demographic decline and the impact this will have on economic and labor conditions. Show Notes: Esther Eaton's TMD Piece: China's Looming Demographic Crisis Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome back to the dispatch podcast. I'm Esther Eaton, deputy editor of the Morning Dispatch. Today, we're taking a look at a big demographic change happening in China. For the first time since the 1960s, China has recorded a population decline. In 2022, 850,000 more people died than were born in China. And that's a trend that is only expected to continue, which has huge implications for China and also for the entire world's economy. Here to explain these implications, we have Scott Kennedy, an expert on China's economy at the Center for Strategic and International Studies.

So I think the first thing to touch on here is that it's actually very common for a country's fertility rate to drop as it develops. So it's not necessarily shocking that this is happening to China. So talk to me about why that is, why that's common, and then whether there are unique factors about China's situation that are bringing its fertility rate down faster. Countries' fertility rates always drop when they have two things that occur as the countries urbanize and as more women get educated and into the workforce. And both of those things happened around the world and in China. The vast majority of Chinese, when communists took over in 1949, lived in the countryside. Even when Deng Xiaoping started the reform era in the late

1970s, early 80s, you still had predominantly rural population where one in seven people on the planet were from the Chinese countryside. But over time, China's become much more urbanized. Even those who are classified as being from rural China, actually many of them live in small towns and cities in China. And when we say small town and city, we're talking like two or 300,000 people. Like that's big in the context of the United States. So China has urbanized a great deal. In addition, Chinese women are are much better educated and have been heavily integrated in the workforce than they were 50 years ago. Most Chinese students that go to college now are female.

And as women get better educated, it's a universal that they have less children. So you add urbanization to a better educated female population. that would have dropped China's fertility rate dramatically, even without the one-child policy. Yeah. Talk to me a little bit about the one-child policy. What role has that played? Certainly, the one-child policy, which was launched in the late 1970s, had an effect on immediately were slowing down China's population growth by essentially limiting every family, particularly urban Chinese, to only one child, a single child. And broadly speaking, one can understand why Chinese public policymakers in the late 70s would want to slow China's population, because

the population was so large that they were fearful. They weren't going to be able to feed their population and that these folks would be a burden on the rest of society. And so they were right to understand that the population needed to slow, but by instituting the one China policy, they had a more rapid transition in their population trend lines than they otherwise would have had. And in addition, because in China, there's a preference for males, for heirs, that sudden shift

not only slowed population growth, but it discriminated against having daughters. And so you've seen a increase in the maldistribution of China's population by gender with a larger, a much larger percentage of people being born, being males, as a result of this cultural preference. So we've seen, in addition to these natural effects of modernization and education, on top of that, you throw on the one China policy, and therefore you see a radically shifting structure of China's population. In 1980, when they started, started the one China policy, if you take sort of like every age group and just sort of like stack them on top of each other, like in a bar chart with the oldest people on top and the

youngest at the bottom, in 1980, China had a Christmas tree, like a triangle, a very nice aosceles triangle with most of the population being quite young. Now gradually, what would happen is that group cohort would move up through the tree. and like food moving through a snake, and gradually, you know, you would see that bubble move. China's moved very, very quickly. Now China looks like most adult men in their 50s and 60s, like me, a pair with a big bulge in the middle, right, of that population that is now much more that is getting toward retirement age. And so, and it's slanted to one side because you have. more men than women as a result. And so that's what the one China policy did on top of

education and urbanization. So we have this lumpy pair that the lump's going to keep moving up and China's population is going to keep aging if these demographic trends continue. And that has a lot of implications for the economy. So why is it that typically as a population ages, economic growth slows or stagnates? Well, it's just pretty simple logic that as the population gets significantly older, a growing proportion of the population isn't in the active workforce any longer. They are retirees. They are folks who are not bringing home a paycheck, paying taxes. They are folks who need to be supported by others. Typically, that's your children and the elderly. And so as China ages, just like every other country that has gone through this,

growth will slow because more resources will need to be produced by those who are still working to take care of not only themselves, but also those that are retired. Now, you can push back against this. You are not defenseless as an economic governor. You can extend the retirement age and China's retirement age was 50 for women and 55 for men for a very long time and they have gradually started to increase that and therefore you can officially just simply by moving that line make people work longer. You can also come up with new kinds of jobs that people can do even after they are older and maybe they, you know, they can't necessarily shovel ditches anymore, but they can work on computers. They can do other kinds of tasks,

which are less, you know, demand, less physical labor. And as China gets more high-tech, develops other new kinds of technologies and skills that are more user-friendly, even for an elderly population, that also might help delay things. In addition, you can work down at the bottom of the tree. You can try and get folks to have more kids. And certainly the Chinese over the last five years have been rolling out incentives, got rid of the one China policy. They now have a three-child policy that encourages everyone to be just like me. And I have three kids to have more kids. But they've had a very difficult time doing that because as you urbanize and people get educated, they just want to have less kids. Now, Japan and South Korea, for example, have

similar sort of demographic trends in that they also have aging populations and some stagnating growth. What are some significant differences between them and China in terms of what this means for quality of life? I think there's a few things that set China apart. We should also recognize even the U.S. as a growing population. Most, many countries do, because we're all, you know, in general, on average, living longer, right? So we're getting up there in age. We're more productive longer, but nevertheless, we have our health care costs go up in populations that are aging. I think two things that differ that make China different from its nearby neighbors. First, scale. China's way, way bigger. Japan's a big country,

140 million people, but nevertheless, it is not 1.4 billion people 10 times with a lot of rural Chinese who live in an environment with very few social welfare services to support even people in the middle of their lives, let alone in retirement. So scale is different. And that means also that Japan and South Korea have much more urban populations relative to China in terms of the proportions of folks. And that also leads to the other difference, which is Japan and Korea got rich before they got old. And so they had already built up systems to help the elderly, a strong social safety net.

and they have that available to people. China's social safety net exists to some extent in cities, very marginally in rural China. China has a public health care system, but it's still actually somewhat expensive. They're private insurance, but it doesn't nearly cover everything that you need. Many Chinese companies really don't have a full-scale, pension system to support people. And then, you know, China doesn't have a built-out system for elderly, independent living, assisted living, et cetera. Now, those systems aren't perfect in the United States and elsewhere, but you need some types of systems that are going to help

which the Chinese now do not have. So this is going to be a real challenge. a country with a per capita income of, say, 12,000 U.S. per year to be able to develop the resources that are going to be needed to help these folks and continue to grow the economy. China still, even with slowing population, still needs to create, you know, nine to 10 million new jobs every single year. And so it's still, it's a big challenge to manage a graying population while you're still relatively poor. and still trying to grow. So a graying population, like you talked about,

comes with some need for growth in health care and elder care of various sorts. So I suppose that's an industry that will grow from this. What are some of the other industries that you expect to be winners and losers, so to speak, from this demographic transition? I think there are a few. Certainly for the elderly,

all of the kind of services that go along with servicing them, basic health care, retirement communities, et cetera, all of the equipment that supports that type of infrastructure. In addition, as China's population growth slows, the cost of labor has been going up as well. So the big irony of the country with the world's largest population is that they feel like they have a labor shortage. So you can, again, try to encourage folks to have more kids. That takes a little while because, you know, you can't be born on day one and day two, be an intern and then work on the streets on day three. It takes a little while. You actually have to raise kids and let them be children for a while. The shortcut, which the

Chinese are working on is automation, is filling that gap by automating factories all over the country. And the Chinese have the world's largest robotics industry in terms of how many robots for factories that they produce every year. They used to just produce a ton and try and export them or sell them domestically and they'd sit in the corner. They're actually being used and implemented right now you add on top of that other types of artificial intelligence and so that type of technology modernization of factories and production uh is going to be an industry that grows in china as well as health care to help folks on the other end um so i think you you have a variety of industries that are are going to grow structurally as chinese society changes

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Get your free quote at ethos.com slash dispatch. That's ethos.com slash dispatch. Application times may vary. Rates may vary. Another way that countries often think about making up for labor shortages is immigration. Why is that less of an option for China? That's a great, great question. It's so important. It's so important. And in fact, we need to recognize how critical that has been in the United States to maintain growth, even at a lower level, open immigration. And I'm not talking about just opening the borders or whatever, but being a relatively open society has been central to the U.S.'s economic growth throughout the existence of our country, including in the last couple decades, at all levels. and in many different industries around the country, there are a variety of economic costs that come with immigration, but typically, in any of the case of the United States,

the economic benefits, I think even the social benefits outweigh those costs, and of course things need to be properly managed. In the case of China, they have not allowed significant inward immigration. They have instead focused first and foremost on encouraging rural Chinese to go work in coastal and urban China and fill those factory jobs that the world has moved to China and trained them up to create the world's largest skilled labor force and large ecosystems in Guangdong around Hong Kong, in cities and towns around Shanghai. in other parts of the country, that's about 200 million people per year that move around to work that are migrant laborers in China. And they'd rather depend on that workforce than importing labor. But nevertheless, looking ahead, as China has less available bodies domestically, they'll have to think, they ought to think about that, particularly skilled labor. You know, most Chinese

that are that grow up in the countryside two-thirds of them don't finish high school right that last one-third may go to high school very small number will go to college the very few number will be really prepared to work in semiconductor fabs punching out semiconductors you know building autonomous vehicles and the like china is if they want to be a high-tech competitor they will need to improve the quality of domestic education but they will need to rely more on imported labor and folks. And that is just very difficult. The Chinese have not wanted to allow a lot of people.

They do have, I'm not sure exactly what the numbers are, but multinational companies, representatives from around the world, have gone to work in China and their families, and they have communities, attend international schools in different cities. But those people typically go to China thinking they'll be there temporarily. Now, a small number, stay there, through retirement until the end of their lives, but most are there on a temporary assignment,

and then they move someplace else. And as a result of the pandemic, a very, very large percentage of that population left China, not to return. They became multinational corporation refugees. I went back to the United States, Europe, and other places. It's going to be very, very difficult to track them to come back again because they've seen what's happened with the pandemic with zero COVID. China's a hardship post to go to now. So China's going to have to do a lot to persuade immigrants, whether from the developing world or from advanced economies, to move their stay long term and contribute to the growth of their economy. Presumably, Chinese officials are going to be very focused on this over the next years and decades. But this is a change that's likely going to

continue to happen. So looking outside of China now, what are some of the impacts that this is likely to have on the global economy? China has been a key contributor to economic growth for the global economy for much of the last 30 years. A significant proportion of global growth has been Chinese growth. In addition, China has helped drive opportunity in other places importing iron ore and raw materials from other countries exporting products that are at lower that are made more efficiently can be sold at lower prices to elsewhere not just that you find at Walmart but in other stores iPhones computers which lower the cost of those products and create a well-

effect for everyone else that you don't notice, you're just spending less than you otherwise would have made. Of course, China is also engaged in some unfair trade practices, stolen some IP, and been less competitive, and that has had a damaging effect in some sectors and some segments of our population in certain regions. But as China ages and its economy slows, you're going to see that on net, China's going to be less of an engine for the rest of the world. And that will have an effect, a spillover effect on the rest of us. But it's going to vary by industries. You know, in industries such as, you know, elderly, senior health care and all the things that we talked about that go with that,

obviously they're going to be Chinese companies that are in that market and because you're in China they're going to have advantages, political advantages, etc. But the United States has one of the best medical health care equipment service sectors in the world. It's extremely large and should be quite competitive. China is already operating there. American medical device makers as well. So on the hardware side, the software services side, there will be more opportunities in those industries for companies from the United States and from other advanced economies as well. I think we're also going to see opportunities in downstream in manufacturing and AI and other places as China's economy transformed. So I think it's going to be a mixed

picture. In general, growth, China's engine is going to slow down, but there's going to be certain industries that will have more opportunities than they've had in the past. And it'll be the responsibility to the U.S. government to make sure that they get those opportunities. The other question I have is, you know, as you mentioned before, the U.S. population is also graying We are not projected to have a population drop, thanks in large part to immigration flow. But I wonder if there are policy implications that you see or lessons that you think U.S. lawmakers could take from China's demographic trends. We have very different approaches towards managing our population, right? China is very interventionist, push, pull, tug. The U.S. is not. U.S. government, I think broadly, at least in terms of intention, takes a hands-off strategy.

There is certainly one lesson is don't try to dramatically transform the composition of the population by imposing massive restrictions and then lifting the off and think everything is going to be fine. You'll get whipsawed and you'll create significant problems. But, you know, I do think we can, you know, recognize that it's not just the size of the population, it's their quality of life, it's their opportunities from cradle to grave, you know, good prenatal care, good child care when people are young. immunizations, K-12 education, tertiary education, support when you're in the workforce so that you can have a healthy family along with a career, retirement support, et cetera. What we need are, it's not really the size of our population that matters, but how we care for them as a society.

And there, I think there's a lot of things we can look where the Chinese have done things wrong and some things where they've done some things right and look at their East Asian neighbors and those in Europe and draw some positive lessons. You know, I'm concerned that the U.S. has unequal access to education, unequal access to health care that will make our population less competitive globally than it otherwise would be. And we make up for that with immigration and a few band-aids here and there. But there's a lot that we can do to have a healthier society from top to bottom, left to right, across the country across regions. I think that's a real responsibility that we have. And China presents, even though it's been growing so fast and looks like it's been catching up in its rearview mirror and might pass us, we're seeing how the break. have been dramatically put on the Chinese economy. I don't think we're past peak China and it's not going to be a challenge, but there's a lot to do to sustain an economy and society, even when you get

as successful as the United States has been. Well, thank you very much, Scott. Those are my questions. Good to have you. Good talking with you. Thanks so much. With Amex Platinum, access to exclusive amex pre-sale tickets can score you a spot trackside. So being a fan for life turns into the trip of a lifetime. That's the powerful backing of Amex. Presale tickets for future events subject to availability and varied by race.

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