Monthly Market Commentary

Demographic Challenges in China

Philip Blancato, Chief Market Strategist, Osaic

Overview:

China is one of the world’s most populous countries. In 2021, China recorded the largest population in the world at 1.412 billion. Since 2022, the population has been steady but is expected to see a continuous decline starting in 2024 (Figure 1).1 The decline in the population of China is due to several demographic challenges that require attention. Prominent among them, and largely a result of the COVID-19 pandemic, is a high youth unemployment rate. This, coupled with long-term challenges such as an aging population and lower birth rates are leading to uncertainty over China’s economic future.

Short-term Challenges:

The COVID-19 pandemic had a major impact on the Chinese economy due to elevated pandemic-era restrictions. The restrictions imposed by the Chinese government were stricter than the majority of the world. The country’s Zero-COVID policy effectively forced all workers, all but those considered essential, to stay home, limiting business dealings and inhibiting the overall economy. This ultimately led to an increase in youth unemployment.

 

High youth unemployment can affect the country both economically and socially. For example, high youth unemployment can slow down or delay economic growth by reducing productivity, decreasing available human capital, and lowering consumer spending. The youth unemployment rate reached 20.8% this May which is an all-time high2 . Higher youth unemployment will also affect how young Chinese citizens view their sense of well-being as well as their prospects for the future. With very few jobs available, the youth unemployment rate has only gotten worse this summer with 11.6 million students entering the workforce.

Long-term Challenges:

The country’s demographics are shifting rapidly as the population ages while the birth rate declines. Figure 2 shows the mortality rate has been climbing since 2005. It has only experienced a couple of dips since then, but those dips were nowhere near being close enough to help the population in the long run. In January, it was reported “that 9.56 million people were born in China last year, while 10.41 million people died. This was the first-time deaths outnumbered births in China since the 1960s.”

The aging population raises challenges such as reduced productivity, shrinking labor force, and increased healthcare, and pension costs. These factors burden the already limited public resources and the overall economy.

 

From 1980-2015 China enforced a “One Child” policy due to concerns that a rapidly growing population would negatively affect the country both socially and economically. This was revoked in 2016, allowing married couples to have 2 kids. With population growth still stagnant, in 2021, couples living in China were allowed to have 3 kids.3 Figure 3 shows the significance of the declining birth rate.4

Conclusion:

The demographic challenges facing China have significant economic implications. The short-term issue of youth unemployment is slowing down the economic recovery from the COVID-19 pandemic, as well as limiting future growth potential. Meanwhile, the longterm aging population and low birth rates are straining public resources and impacting social dynamics imperative to economic growth. This is having an immediate impact on Chinese economic activity but may soon spill over into the rest of the world.

Disclosures

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1 https://www.statista.com/statistics/263765/total-population-of-china/
2 https://www.cnn.com/2023/06/15/economy/china-rate-cut-youth-unemployment-intlhnk/index.html#:~:text=Urban%20youth%20unemployment%20%E2%80%94%20already%20at,t%20included%20in%20official%20data.
3 https://www.reuters.com/world/china/how-china-is-seeking-boost-its-falling-birth-rate-2023-01-17/#:~:text=To%20encourage%20more%20births%2C%20local,maternity%20leave%20and%20housing%20subsidies.
4 https://www.statista.com/statistics/251045/birth-rate-in-china/

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