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How China’s Demographic Crunch will affect Consumption in its Economy

China is growing older.  To be sure, the populations of other countries, especially developed economies and China’s northeast Asian neighbors, Japan and South Korea, are also turning grey.  But this process has unfolded with exceptional speed in China.  According to the World Health Organization (WHO), an economy enters into its “aging” phase when the share of the population aged 65 or older exceeds 7%.  China reached that demographic yardstick in 1998 and by 2023, the share of Chinese aged over 65 had more than doubled, rising to 15.4%.   WHO estimates that by 2040, China will have 402 million people aged over 60, up from 254 million in 2019.  As Professor Sabrina Luk of Nanyang Technology University told Business Insider, “China became an aging society in 1999.  It will become an aged society by 2026, and a super-aged society by 2047.”

This shift in the age profile of China is occurring alongside a fall in its population.  According to official Chinese Government data, the population of China dropped by 2.08 million people in 2023, with the number of death (11 million) exceeding the number of births (9 million).  That fall followed a population decline of 850,000 people in 2022.  This trend is set to continue, due to declining fertility rates—the fertility rate is the number of children a woman will give birth to over her lifetime—among Chinese women.  Those rates have fallen from 1.5 birth per woman in the 1990s to 1.15in 2021, well under the replacement rate of 2.1 needed for a country to sustain its population.  The UN therefore forecasts that the Chinese population will fall from 1.426 billion in 2022 to 1.31 billion by 2050 under a so-called “medium variant” that assumes, among other things, a fertility rate for Chinese women that stays constant at 1.18.  It is worth noting that the Chinese population still declines, albeit more modestly, even when the UN assumes that China’s fertility rate rises from 1.18 per woman in 2022 to 1.48 in 2100.     

Source:  Laura Silver and Christine Huang, “Key Facts about China’s Declining Population,” Pew Research Center, Short Reads, December 5, 2022. 

The projected fall in the numbers of Chinese, coupled with the rising proportion taken up by the elderly, implies a drop in both the share and numbers of Chinese aged between 15 and 65 in the  population mix.  Their numbers will shrink from a peak of over 900 million in 2011 to about 700 million by 2050, with their share of the population falling from its current level of 68% to 58% at the middle of the century.  

A good deal has been written on the impact of these population shifts in reducing the labor force and, by extension, limiting China’s ability to remain a manufacturing hub and causing its economic growth to decelerate.  In this blog post, I will instead address how the contracting number of non-elderly adults will affect levels and patterns of consumption in the Chinese economy.  I will argue that consumption will be squeezed not just by the overall contraction in the number of Chinese aged 14-65, but fall in size of the 20-40 age cohort, who are the biggest consumers of goods and services.  The household registration, or “hùkŏu (户口),” system will also constrain consumption levels among the not insubstantial number of rural people who have yet to migrate to Chinese cities after they relocate to urban centers.  Even if China does away with the hùkŏu, which I will argue is not likely in the immediate term, and manages to raise income levels among its very poor, its inadequate social safety will continue incentivizing Chinese households to save money rather than spend it on goods and services.  Finally, as if this were not enough, two collateral impacts of China’s rapid aging will be a further brake on consumption.  One is the higher dependency burdens on younger and middle-aged people, who will need to spend money supporting their aged parents and preparing for their own retirements instead of buying things.  The other is the impact of a shrinking population in depressing property values, especially in lower tier Chinese cities. 

The past two-and-half decades of fertility levels falling below replacement rates among women in China is already diminishing and will result in the much greater hollowing out of its young and middle-aged adult population.  According to Nicholas Eberstadt, holder of the Henry Wendt Chair in political economy at the American Enterprise Institute Washington think tank, the numbers of these Chinese and their share of the population will decline sharply over the next decade and a half.  Eberstadt notes that between 2015-2040, the size of the 30-49 age bracket is estimated to shrink by 25%, or well over 100 million men and women, with their share of the Chinese labor force (people aged 15-65) dropping from 43 to 37%.  

Unfortunately, when it comes to China rebalancing its economy toward consumption-driven growth, it is absolutely essential for it to maintain and grow the population of young and middle-aged adults.  People in these age brackets typically comprise the heaviest buyers of goods and services.  Individuals purchasing their first flats need to acquire home appliances, like refrigerators, cooking ranges, and washing machines (most Chinese do without conventional ovens/stoves or dryers), as well as furniture.  In addition to these consumer durable goods, most young adult married and unmarried Chinese strive to own an automobile—among young, single men, owning property and a car are key prerequisite to finding a bride.  Middle-aged men and women, single or married, will make further purchases of these consumer durables to replace the ones they bought earlier that have worn out after years of use.  These individuals are also heavy consumers of the latest computers, laptops, tablets, I-phones and other gadgets.  Married couples with children buy such items for their sons and daughters, as well as having to spend more on food and clothing for them.  If they can afford it, these couples will acquire a larger flat so their son or daughter can have his/her own room.  Due to the highly competitive nature of China’s educational system, these couples, at least the ones with the financial wherewithal to do so, invest heavily in education services, such tutoring and after-school enrichment programs, for their children.  Finally, people in their late 20s through 50s, are likely to be relatively heavy consumers of services, such as dining out, entertainment, and, for those who are relative affluent, financial and investment advice.  Thus, having a contracting cohort of young and middle-aged adults will, by itself, dampen consumption in the Chinese economy.

This bad news is further underscored by briefly considering the very different consumption habits of elderly individuals.  Seniors are not big purchasers of consumer durable goods.  Rather than buying houses and flats, they are typically moving out of such dwellings and getting rid of most of their furniture, appliances, and the like, before moving in with their children or going into senior care facilities (more about the latter option shortly).  Older people lose their ability to drive, thereby aging out of car ownership.  Seniors also tend not to be very “techie”—the current cohort of elderly Chinese, at least, are not that well educated—and less prone to purchase electronic gadgets.    

We can therefore say, all other things being equal, that as the numbers and share of Chinese over 65 rises and that taken by those in their 20s to 50s shrinks, the overall consumption mix in China’s economy will shift markedly.  The importance of the kinds of purchases made by the latter group will diminish relative to the things consumed by seniors.  The latter include items like adult diapers, walkers, walking canes/sticks, wheelchairs, and the like, as well as medicines for chronic diseases, such as diabetes, heart problems, and various kinds of cancer.  The demand for medical and care-giving services aimed at the elderly will also rise.  For non-Chinese companies willing to brave the increasingly fraught business environment the Chinese Government has created for such firms, all of this presents a very promising investment opportunity.   

It bears emphasizing here that China is currently not well prepared to provide caregiving services to its upcoming tsunami of very elderly citizens.  Traditionally, Chinese seniors have relied on their children, especially sons (and in some cases daughters) to care for them in their old age.  Hence, the Chinese saying, 养儿放老 (yăng ér fáng lăo), the literal meaning of which is “Raise children and let them grow old,” but best denotes “Raise children to care for you in old age.”  However, China’s declining birthrates and consequent huge number of children without siblings, along with the fact that many of them do not live in same city or town as their parents, has made fulfilling such filial duties increasingly burdensome.  In 2013, the Chinese Government enacted the “Elderly Rights Law” penalizing adult children for failing to frequently visit their ageing parents.  Three years after its passage—the law was widely ridiculed upon introduction and has been haphazardly enforced—China’s National Government began trialing a national insurance scheme for aged care across 15 cities, such as Shanghai, Shenzhen, Guangzhou, and Chengdu.  Funds for these schemes are drawn from an existing insurance pool that all urban working resident pay into, so seniors seeking long-term care do not necessarily need to pay a premium for it.  Unfortunately, there is still a shortfall in facilities covered by this scheme and standards for elderly care among the ones that do exist are inconsistent, while standardized training or qualification systems for caregivers are lacking.  Finally, as is generally the case with health care in China, access to good senior care is likely to vary widely across the country, with large gaps between the wealthiest and poorest provinces.

The challenge China faces here is underscored by the following demographic data point.  Within China’s rapidly expanding senior population, the fastest growing contingent are those aged 80 or older.  Their share of the overall Chinese population is expected to rise from 1.7 to 4.9% between 2015-2040.  Besides being more physically frail, individuals in the 80+ age bracket are at a much higher risk for dementia and Alzheimer’s.  Even if their sons and daughters are willing to look after these elderly Chinese, they will have to be put in facilities with skilled caregivers trained to deal with dementia and Alzheimer’s patients.  The projected fall in the number of working age Chinese raises real questions about whether enough of these personnel will be available for elderly individuals needing special care.  Indeed, anticipating such shortages, some Chinese cities, notably Shanghai, are experimenting with using robots to look after the elderly.  

China could offset the adverse impact of its unfavorable demography on consumption in its economy by substantially raising incomes among its young and middle-aged adults.  Doing that could more than offset the impact of their contracting numbers on the demand for goods and services.  One obvious channel for doing that would be moving people from rural villages to cities.  Although hundreds of millions of Chinese have migrated from the countryside to the cities since the early 1980, urbanization in China has yet to achieve levels found in affluent highlydeveloped economies.  Nearly 1 out of 3 (32%) Chinese currently still live in rural areas; by contrast, 90% of Japanese live in urban areas, while the figures for the US and Europe are 80-90%.  In his recent and very important book, Invisible China:  How the Urban Rural Divide Threatens China, Stanford University professor Scott Rozelle has detailed the huge gap in incomes and living standards in the Chinese countryside vs. cities.  That gap has continued to widen, despite Government efforts to close it, like previous President Hu Jintao’s 2005 “New Socialist Countryside” scheme.  Thus, fully urbanizing China could be expected to raise incomes and living standards among large numbers of Chinese, thereby boosting consumption in the economy.

However, the positive impact of shifting people from rural villages to the cities will be at least somewhat blunted by China’s hùkŏu household registration system.  People born in villages receive rural hùkŏus and can only access government health insurance, welfare, and pension schemes for rural residents.  Their sons and daughters receive the free primary through middle school education given to Chinese children only if they stay in their villages to be educated.  Like the previous waves of rural migrant worker, or 农民工 (nóng míng gōng), this final surge of Chinese moving from villages into cities will therefore have to leave their children behind, placing them under the care of their elderly and badly educated grandparents while they attend primary and middle school.  These nóng míng gōng will also not qualify for the more generous government health insurance, welfare, and pension programs given to Chinese with urban hùkŏus.  They will become new members of China’s estimated close to 400 million strong urban economically marginalized “floatingpopulation,” lacking the educational and social benefit rights of regular city-dwellers and typically receiving lower compensation in the workplace than urban hùkŏu holders with similar levels of schooling and skills.

Despite years of talk and efforts to reform the hùkŏu system, very little has been done to fundamentally alter or do away with it.  Cities remain reluctant to granturban hùkŏus to nóng míng gong, fearing that they will be unable to afford doing that—in China social welfare provision is financed entirely by local governments.  Their opposition to doing so has been reinforced by China’s recent real estate meltdown, which has fiscallysqueezed local governments by significantly lowering revenue from land sales, which are critical to funding municipalities.  That, in turn, has put downward pressure on local government spending.     

One irony of the ongoing failure of Chinese cities, especially the biggest first tier metropolises, to be more welcoming to rural migrants is that they face looming massive labor shortages.  Due to the high opportunity costs of having children on their earnings, careers, leisure time, and personal self-development, all of which are painstakingly documented in the latest 2024 YuWaPopulation Institute report on the costs of raising children in China, urban Chinese women are increasingly eschewing motherhood.  Fertility rates among these ladies are even lower than China’s overall extremely low fertility rate, with the rate among those living in Shanghai clocking in at under 1.0 (0.7).

Even if China were to abolish the hùkŏu system and manage, through higher economic growth, to improve living standards among the nearly 1 in 4 Chinese who, according to the World Bank, were living on $5.50 a day in 2020, its weak social safety net could limit the consumption dividend stemming from an expanded middle-class.  With respect to health insurance, as a December 2023 World Bank report on China’s post-pandemic growth path notes, the share of health expenditures financed by government spending doubled to 55% between 2000-2020.  Over that same period, the share health care expenditures borne by households out of pockets declined from 59% to 35%.   But the World Bank report also notes that the latter figure remains much higher than that those observed in EU countries (14.4%), Japan (12.6%), or the US (10%).  Moreover, general government spending on health care still accounts for just 3% of China’s GDP vs. an average of 7.8% among OECD countries in 2019.  Although nearly all Chinese adults have some form of health insurance, the level of effective coverage is much lower, with two-thirds having to pay for many health care costs out-of-pocket, especially for medications.  Last but certainly not least, it is still the case that people pay up front for medical care before getting reimbursed by their insurance providers for such expenditures.  This forces households to set aside money for unexpected health emergencies.   

China also falls short when it comes to providing for those who are unemployed and fallen on hard times.  Under the current social safety net, just 200 million Chinese workers receive coverage from their employers for unemployment insurance.  Left out of those working in small and medium enterprises, especially ones that are privately owned.  Even workers in large firms receiving such coverage must have normal contracts with their employers and pay into the unemployment insurance system for at least 12 months before becoming eligible for benefits, which fall far short of meeting basic living costs.  Thus, giving China’s large army of nóng míng gōng access to the welfare coverage given to urban hùkŏu holders would only marginally improve their income security and living standards. 

Instead of extending and strengthening the social safety net during the Covid Crisis, when severe lockdowns created extreme hardship for huge numbers of Chinese, government authorities tried to pare back welfare benefits.  During the pandemic, Chinese cities were hit with a fiscal double-whammy.  They had to foot the large bill for enforcing the lockdowns and carrying out mass testing while suffering substantial revenue losses from the diminished economic activity associated with such measures.  A number of municipal governments, including those in Dalian, Wuhan, and Guangzhou reacted by curtailing health benefits, including those targeted at retirees, sparking widespread protests.  At the same time, President Xi has made clear his hostility toward government aid to able-bodied people who are down on their luck.  In a statement quoted in an August 23, 2024 New York Times article, Xi declared that China “must not aim too high or go overboard with social security, and steer clear of the idleness breeding the trap of welfarism.”  Rutgers University professor Huang Xian, a leading authority on Chinese policy, who is also quoted in that Times article, observes that for “Middle-aged and young people, the government’s idea is that they can always find a job, or least they should try to find a job, therefore they can be self-reliant.”         

For the foreseeable future, then, Chinese households will, as they have done in the past, continue to set aside money as precautionary savings for medical emergencies and unexpected economic hardship, rather spending it to consume goods and services.  In 2019, private consumption accounted for just 39% of China’s GDP, compared to the global average of 60%.  According to a 2018 International Monetary Fund study, while the Chinese GDP per capita in purchasing power parity terms, which factors in price differences between countries, equaled that of Brazil, Chinese per capita consumption levels only matched those of Nigeria.   This was before 2-3 years of draconian government-imposed Covid 19 lockdowns hammered household incomes and spending and devastated small private business owners.  We can expect that in post-Pandemic period, China’s economy will keep punching below the size of its overall GDP when it comes to consumption.    

 A final brake on China’s shift to a consumption driven economy are two adverse collateral impacts of its rapidly aging population.  One is the strain that demographic change will place on its ability to fund pensions for the older retirees.  The other is the downward pressure an increasingly geriatric population structure will exert on the Chinese real estate market and housing prices.

 As the graphic below illustrates, dependency ratios in China, or the number of very young and older individuals unable to support themselves, in relation to the working population will rise steeply between 2020 and 2050.  Whereas in 2020 there were 44 dependents for every 100 working age individuals, the ratio in 2050 will increase to 73 dependents for every 100 working age individuals.  Given the China’s chronically low birthrates and surging numbers of seniors, the bulk of these dependents will be elderly retirees.

 Source:  Lex Rieffel and Wang Xueqing, “China Population Could Shrink to Half by 2100,” Scientific American, May 1, 2024

This shift spells big trouble for the most important component of China’s highly fragmented pension system for individuals not employed as civil servants, the Urban Enterprise Pension System (UEPS), which covers city-dwellers employed in private firms and State-Owned Enterprises.  This basically pay-as-you go scheme has long relied on a high ratio of workers to retirees.  The pensions of retirees have been funded not just by their past contributions, but also by what those who are working put into the system.  Thus, as China rapidly ages, the UEPS, along with other underfunded Chinese Government social security and pension funds face huge unfunded future liabilities.  A 2019 report by the Chinese Academy of the Social Sciences warned that as the ratio of workers to retirees declines, the National Social Security Fund, established in 2000 to finance future Chinese pension obligations, would likely go bust by 2035.  Although the Chinese Government has been exploring various ways to strengthen the pension system, including improving coverage for the neglected rural migrant laborers, such efforts are very much a work in progress.  All of this uncertainty about the future of social security in China will strongly incentivize non-retirees to set aside funds as precautionary savings to support not just their own retirements, but assist elderly parents in facing possible cuts in their pensions.      

The drag China’s aging population will exert on its housing market and property values will further constrain its ability to reorient its economy toward consumption-driven growth.  After decades of a huge real estate boom, which saw real estate’s share of the Chinese economy rise to nearly one-third, Beijing sought in 2020 to cool down the housing market by cutting off the easy credit spigot that had fueled that expansion.  This set off a chain reaction leading to the bankruptcy of dozens of big developers, including industry giants like Evergrande and Country Garden.  Years after this crisis began, according to Bloomberg Economics, China now has 60 million unsold apartments, which will take more than four years to sell off without government intervention.  By dampening future housing demand, the dwindling number of young adult and middle-aged Chinese, who comprise the biggest buyers of homes and apartments, will hinder the long-term recovery of the residential real estate market in China.

This problem is going to be especially acute in so-called lower-tier Chinese cities, which have the largest oversupply of housing.  In a September 2022 International Monetary Fund Occasional Paper, Harvard economist Kenneth Rogoff and Yang Yuanchen estimated that the aggregate total housing stock in tier 1-3 Chinese cities rose from 39 billion to 56 billion square meters between 2010-2021.  Tier 1 cities comprise the most developed and desirable metropolises, especially for foreign investment, such as Beijing, Shanghai, and Guangzhou.  Tier 2 cities are ones with lower GDPs than their tier 1 counterparts, but are still attractive investment destinations, such as Chengdu.  Rogoff and Yang note that Tier 3 cities, consisting of poorer provincial capitals and ones of more limited political and economic significance with large populations, accounted for 78% of the growth in the housing stock over that decade.  This was despite these cities being home to 66% of Chinese urban residents.  They estimate that between now and 2035, real estate construction in such places will have to shrink by roughly 30%.  This supply-demand imbalance will be exacerbated by the likely outflow residents moving to higher tier cities in search of better jobs and improved living standards.  All of this comes on top of the long-term impact of China’s demography in lessening the demand for housing in such metropolises.  The large number of residents staying put in third tier cities who bought flats during China’s real estate boom will be stuck with an asset whose value will not, as they had expected after buying it, rapidly appreciate, but will instead significantly decline. 

The long-term squeeze on housing prices associated with China’s aging population is highly consequential for the future role of consumption in its economy.  Even more so than in affluent Western and Asian economies, housing is a major store of wealth for ordinary Chinese families.  Indeed, it could be argued that it is the only store of wealth for middle-class Chinese.  This fact stems government financial policies.  “Financial repression” and consequent government suppression of interest rates on bank savings deposits, combined with the dodginess of Chinese equity markets and capital controls, have made buying property the only realistic avenue for accumulating wealth.  As the large numbers of Chinese who are current and future residents of lower tier cities see the value of their flats not just fail to go up, but actually fall, they will feel poorer and be less inclined to buy lots of goods and services.  This may also hold true, albeit to a lesser extent, for people in upper tier cities.  That, however, will depend on the degree to which inter-urban migration might offset impact of population declines associated with plunging female birthrates in such metropolises (the limited incomes of rural migrants to such metropolises, along with the hùkŏu system will make it impossible for these individuals to buy property in expensive upper-tier city markets). 

In sum, China’s rapidly aging demography and concomitant shrinking of its cohort of young to middle-aged adults will make boosting the role of consumption in its economy a very heavy lift.  As I have tried to make clear in this blog post, that lift is made all the heavier by misguided Chinese government policies.  I plan on doing a future blog post on how those macro-economic policy choices make rebalancing the Chinese economy toward consumption easier said than done.  Stay tuned!