China’s population will start to decline in the coming decade and will likely continue down for the rest of this century. According to Ning Jishe, head of the National Bureau of Statistics (NBS), China’s total fertility rate — the number of children a woman will have over her lifetime — is now only 1.3. This is the lowest among countries with similar incomes and well below the 2.1 needed to sustain a stable population.

Even during the time of China’s one-child policy, abolished in 2015, the number was never lower than 1.6. After a brief baby blip in 2017, the switch to a two-child policy had not changed the tide.

The authorities reacted to the latest census data by further relaxing its family policy, allowing three children per couple, and promised supportive approaches to convince couples to have more children. Though measures such as baby bonuses, tax credits, better childcare support and fighting workplace discrimination may help, few countries in similar circumstances in the past have seen a major rebound in fertility.

With a total fertility rate of 1.3, China’s population will decline faster than most projected. The current ‘medium variant’ projections of the UN Population Division assumed a total fertility rate of 1.7, implying a population of about one billion by the year 2100.

The actual rate is instead closer to the 1.2 assumed in the ‘low variant’ projection that predicts a population of below 700 million in the same timeframe.

Does this mean that China will fail to overtake the United States economically? Not necessarily.

Demographics have already stopped contributing to China’s economic growth. The labour force has been declining since 2012 and is now some 40 million fewer than a decade ago.

Accumulated human capital — China’s investments in education — will play an increasing role in driving productivity as the better educated enter the workforce. Since the last census, the share of university graduates has almost doubled to 15 per cent. Among the current cohort entering the labour force, tertiary education is almost 40 per cent, comparable to that of South Korea when it reached China’s current per capita income.

Even with lower fertility, population decline will only set in in earnest by the end of the decade. By 2035, China’s population will still be 1.41 billion in the UN’s low variant projection, about the same as today. This will be just 50 million less than previously projected in the medium variant — not enough to make a significant economic difference.

China also still has a large hidden reserve of labour that it can mobilise. The country’s young retirement age — 60 for men, 55 for women — means the labour force is smaller than it need be. If China could achieve the same labour force participation among the elderly as Japan does, by the end of the decade the labour force would be some 5 per cent — 40 million people — larger.

Technological development, robotisation and artificial intelligence will make it easier to work longer and more productively, and to take care of the elderly better than in the past. This is a good time for societies to be growing old before getting rich — that have accumulated human capital assets among the prime working-age group and youth especially.

China’s population above 60 makes up 18.7 per cent of the toat, up by more than 5 per cent compared to a decade ago. China’s pension system is not in good shape. According to China Academy of Social Sciences projections, by the mid-2030s China’s pension coffers will run dry.

The balance of the urban pension system in 2019 was 4.3 trillion RMB (US$669 billion) and the National Social Security Trust Fund contained an additional 2.7 trillion RMB (US$420 billion). Including the enterprise annuity pillar, total public and private pensions of China in 2019 were valued at only US$1.85 trillion, or 12 per cent of GDP, compared to 136 per cent in the United States and 66 per cent in Japan.

The government budget contributes 580 billion RMB (US$90 billion) every year to provide for pensions. What’s more, the rural pension system is only in its infancy — more than half of rural retirees rely on modest pensions that average less than 10 per cent of the average urban pension. The pension debt that will accrue when these systems become more equal is huge.

These fiscal pressures come at a time when China’s budget resources as a share of GDP are declining. The conversion to a consumption-based value-added tax in 2016 and tax relief measures in the wake of COVID-19 mean that China’s tax revenues are now barely 19 per cent of GDP, down from 22 per cent in 2015, just more than half of the 34 per cent of GDP that OECD countries raise.

China’s government could incur more debt to finance the costs of ageing, but with the augmented debt ratio at 90 per cent of GDP, fiscal space has narrowed dramatically since the global financial crisis. It could also tap into the vast holdings of state-owned enterprises to finance the gap, but current policy directions are unlikely to allow the sale of these assets.

While demography presents these challenges, China’s economic momentum over the next two decades is unlikely to be knocked off course and its policy resets are designed to address its drag on growth in the longer term.

Bert Hofman is Professor of Practice and Director of the East Asian Institute, National University of Singapore.