China’s bid to manage the Silver Economy

The country’s coming demographic crisis is inevitable but manageable

From a struggling real estate sector to serious labor shortages, China is beset by problems that will require a lot of time and effort to solve.

And as if this weren’t enough, Beijing will have to address these issues amid a much more potent challenge that affects its long-term economic trajectory more than the others: a declining and aging population.

According to figures published by China’s National Bureau of Statistics last week, the overall population in mainland China fell by roughly 2.1 million to 1.4 billion in 2023. Slightly over 9 million babies were born last year – the lowest amount since records began in 1949 – while about 11 million people died, pushing the death rate to a five-decade high.

And though this burgeoning demographic problem has already affected the economy – the NBS also announced that the Chinese economy grew by a disappointing 5.2% in 2023 and is expected to slow further – the long-term consequences could be more dire as it impacts consumer and housing demand, public finances and health care.

These issues began in 1979, when President Deng Xiaoping introduced measures that would eventually be referred to as the one-child policy. The measures were meant to manage overpopulation and to free up as much of the population for work as possible ahead of the country’s economic opening.

Accordingly, Chinese fertility rates fell in the 1980s from an average of six to seven births per woman to less than three. By the 1990s, that average had fallen to less than two, which was considered the point below which the population would decline. It has stayed that low since.

The relief from child-rearing needs did free up more people to work outside the home in China’s factories, contributing to the export-driven economic surplus China came to be known for and providing finances for the ambitious infrastructure projects headlining China’s “miraculous” development. NBS estimates say the economy grew by 10% per year for decades.

However, the low birth rates of the last roughly 40 years have radically slowed the replacement of older workers by their children. Over the past 10 years alone, shortages of available labor have held back overall growth rates. According to NBS statistics, China has only half the number of factory workers it needs – not nearly enough to prop up sagging economic growth.

Within the broader problem of unemployment, youth joblessness is an especially pressing issue. The jobless rate for 16- to 24-year-olds has climbed since 2020, reaching nearly 15% in December. This number owes largely to a protracted pandemic-induced government crackdown and skittishness among big tech companies to hire new employees.

Put simply, fresh college graduates are struggling to find jobs appropriate for their degrees, and many of them have refused to take blue-collar jobs or move to the smaller cities and rural areas that desperately need workers. There is now an uneven supply-demand ratio that has proved extremely difficult to rebalance.

Since the failures of the one-child policy emerged, Beijing has sought to encourage births by gradually easing the measures imposed by Deng to allow a second – and even a third – child. Local governments have even offered incentives for new children.

A municipality in China’s Inner Mongolia region, for example, has started to offer payments of 2,000 yuan ($280) for a second child and 5,000 yuan for a third, and has required employers to give an extra 60 days and 90 days of paid maternity leave for second and third children, respectively.

Yet these measures have found little success for a variety of reasons. Many Chinese residents are delaying marriage or choosing not to have children at all, and those who do often feel that financial considerations limit them to one child. The population of women of childbearing age has also fallen.

Notably, the COVID-19 pandemic only reinforced these trends as the economic slowdown, the high unemployment rate among young people, and the overall uncertainty about the future discouraged people from getting married and having children. This helps to explain why 61% of China’s population was of working age in 2023, down from about 70% a decade ago.

All this creates a bleak outlook for China. Because workforce and productivity growth greatly influence overall economic growth, it’s reasonable to assume that a decline in the former will result in a decline in the latter. Moreover, as the pool of workers shrinks, hourly wages increase. If that happens, factories in China may choose to relocate to countries with cheaper labor, such as India, Bangladesh and Vietnam.

Fewer people will mean lower demand for goods and services, and lower demand could obstruct China’s efforts to transition from an investment-led to a consumption-led economy. Already this is hurt by China’s massive wealth gap.

And with more people choosing not to have families, demand will decline for real estate, which, despite its struggles, still accounts for 20-30% of the economy.

Given the policy failures to reverse China’s demographic trends, one available alternative is to goose immigration. Currently, China has only around 1 million foreign-born residents living in the country, equal to less than 0.1% of the population. In fact, China has the smallest number of immigrants of any major country in the world. Because of an insistence on maintaining racial purity, however, the Chinese leadership is disinclined to heterogeneity, and its policies reflect as much. For example, foreign-born people cannot earn Chinese citizenship unless they are children of Chinese nationals, and foreigners are allowed to purchase only one piece of property in China (their residence). If Beijing were to relax its immigration policies, there would be long-term benefits, but for it to make a difference in the short term, the numbers would need to increase tremendously in the next decade – which is unlikely to happen.

Even so, Beijing is dead set on boosting economic growth and recovering from the pandemic, and though the odds are against it, it still has some options available. If the labor pool remains stagnant, it can increase the economic output per hour worked by, for example, using more sophisticated equipment, relying more on automation technology like robotics and AI, investing in education and training, improving infrastructure, and boosting research and development.

Of these options, the tech-based ones are likely the most promising, and the Chinese government seems to understand has much; Beijing has already upped its use of industrial robotics, especially in regions and industries that have been hit the hardest by the recent population shifts, such as the textiles industry in Jiangsu and Zhejiang provinces.

China’s current “robot density” – the number of robotic units per 10,000 manufacturing workers – is 392. Total operational stock in China passed the 1.5 million-unit mark in 2022, with 290,000 units installed last year, according to the International Federation of Robotics.

The IFR estimates that China accounted for more than half of industrial robots installed worldwide last year.

The downside here is that though robotics have the potential to reduce the impact of aging on China’s manufacturing sector, they won’t necessarily prevent companies from moving to cheaper countries.

It’s worth noting that Beijing recently announced a plan to manage China’s “silver economy,” which entails all the goods and services targeted to older people – meal delivery, nursing homes, entertainment options, and, most significantly, health-related consumption of everything from medical devices to pharmaceuticals. According to recent estimates, the silver economy will be worth an estimated 30 trillion yuan in the next decade, accounting for 10% of China’s overall economy by 2035. Biotech firms that were hit hard by the post-pandemic slowdowns are especially wellpositioned to benefit.

The reality is that China’s population decline is a process that cannot be stopped. Its demographic trends will place downward pressure on Chinese consumer spending and upward pressure on wages and government spending.

This can be managed and its risks mitigated through shrewd formulation of policies to bolster the workforce, but given some of the other problems present in the Chinese economy, even this is no sure thing.