China’s Population Decline and the Ripple Effects

China’s government recently released new data showing that the country’s population has begun to grow negatively. It is a significant shift that will have broad ripple effects across the country and worldwide. 

For the first time in decades, the number of deaths in China exceeded the number of births in 2022, a shift that could profoundly reshape the global economy. So why is a declining population not good news? 

The first problem is that a declining population also means an aging population without a stable foundation of support. Populations generally rely on the young to support the elderly. 

As China’s social security system is relatively underdeveloped, its elderly rely heavily on government assistance. In the short term, negative population growth will reduce government spending on newborns and youth development. As we see less labor force participation in the Chinese economy, fewer citizens are required to support a growing elder population, leading to reduced tax revenue being collected from the smaller participating working force and contributing to significant economic pressure. 

An aging population, in turn, means an increase in the burden of pensions and medical care for the whole society and a continuous accumulation of the risk of social insurance revenues not covering expenses, which affects social harmony and stability. China’s social insurance system relies heavily on financial subsidies and cannot maintain a self-sustaining balance. 

In other words, the funding of social programs ultimately depends on taxes paid by the working-age population, and concerns about the long-term fiscal future of China stem primarily from the rising proportion of older dependents — that is, the ratio of older people to the working-age population. 

As the proportion of China’s elderly dependents soars, the government faces the difficulty of imposing heavier taxes, which would restrain people’s willingness to spend or decrease government spending. This may be detrimental to many families and individuals relying on government support. 

The other problem is more subtle but also severe. To maintain full employment, a country must maintain high aggregate spending to keep up with the economy’s productive capacity. A shrinking population would make this task easier by reducing production capacity. 

However, a declining population, especially working-age, often reduces some essential expenditures, especially investment. Therefore, the impact of negative population growth on the demand side of the economy is more prominent. 

In the case of specific per capita consumption, population reduction means a decline in total consumption. At the same time, due to the bearish market outlook and deteriorating expectations, corporate investment decisions tend to be conservative, and investment intentions subsequently decline, inhibiting entrepreneurship and private enterprises. 

As a result, the development gap between industries is widening, and traditional industries such as agriculture and foodstuffs, textiles, and daily necessities are facing more significant difficulties in development. 

Some production capacities and enterprises will be scrapped and withdrawn from the market. If the number of workers declines, there is less need to build new capital. In the long run, the declining population would signify the slowdown of China’s economy. All else being equal, China, with a declining working-age population, might be more susceptible to economic weakness. 

Beyond the problems already discussed, the government might save public resources. Negative population growth reduces the number of people served by infrastructure, public facilities, and other corresponding services, posing a greater challenge to the economies of scale and value realization of public resources. 

Taking education resources as an example, with the implementation of the new urbanization strategy, urban-rural and regional population movements have accelerated. The school-age population in many rural areas and small towns has significantly declined, resulting in many school buildings being left unused. Population shrinkage will also significantly increase the difficulty of allocating public resources, placing higher demands on timely grasping population changes and making scientific forecasts.

Beyond domestic impacts, economists are worried that China’s shrinking workforce could be detrimental to the global economy because China remains one of the world’s largest export countries. Moreover, since the country’s demographic and economic development prospects are bleaker than expected, the world may be facing the question of who will fill the gap for a cheap labor force. China’s past “miracle” and former status as the “world’s factory” was based on a labor surplus. Today, the country is facing a labor shortage.

However, there may be opportunities for China to change this negative outlook. First, it is critical to promote economic transformation and development to enhance national welfare. With negative population growth, less production capacity will be reserved to meet the demand of the newborn population in the future, and a greater amount of national income can be released for consumption and welfare, thus improving living standards. 

Negative population growth in China will create favorable conditions for expanding the role of consumption in economic development and promoting economic transformation. At the same time, given a certain amount of resources, a declining population means a higher per capita share of resources and an improved level of welfare. 

Second, population decline might alleviate the pressure on resources and the environment and strengthen ecological protection. Reducing China’s population is conducive to easing ecological carrying pressure, promoting environmental protection and restoration and promoting more coordinated development of population, resources, and the environment.

The negative population growth trend has led many to lament that China may enter an aging society before it becomes affluent. This phenomenon will likely imply slower economic growth, as the government will soon outlive its income when health care and social welfare costs soar. This internal impact may motivate the Chinese government to seek new directions regarding their regime. It may lead to possible changes, such as new regulations regarding birth policies, in the country in the following years.