Why China’s Shrinking Population Is Cause for Alarm

New data released this week by the Chinese government revealed that China’s population has begun to shrink, a momentous shift that will have broad ripple effects both domestically and globally.

The government said on Tuesday that deaths last year in China had outnumbered births for the first time in decades.

This could spell the end of China’s position as the world’s most populous country, a transition that could profoundly reshape the global economy in the long run. India’s total population is expected to surpass China’s later this year, according to a recent estimate from the United Nations. Here’s why economists and others are alarmed by the developments.

For years, China’s massive working-age population powered the global economic engine, supplying the factory workers whose cheap labor produced goods that were exported around the world.

In the long run, a shortage of factory workers in China — driven by a more educated work force and a shrinking population of young people — could raise costs for consumers outside China, potentially exacerbating inflation in countries like the United States that rely heavily on imported Chinese products. Facing rising labor costs in China, many companies have already been shifting their manufacturing operations to lower-paying countries like Vietnam and Mexico.

A shrinking population could also mean a decline in spending from Chinese consumers, threatening global brands dependent on sales of products to China, from Apple smartphones to Nike sneakers.

In the short term, a plunging birthrate poses a major threat to China’s real estate sector, which accounts for roughly a quarter of the country’s economic output. Population growth is a key driver of housing demand, and homeownership is the most important asset for many Chinese people. During widespread pandemic lockdowns that dampened consumer spending and export growth, China’s economy became even more dependent on the ailing housing sector.

With fewer working-age people in the long run, the government could struggle to pay for an enormous population that is growing older and living longer. A 2019 report by the Chinese Academy of Social Sciences predicted that the country’s main pension fund would run out of money by 2035, in part because of the shrinking work force.

Economists have compared China’s demographic crisis to the one that stalled Japan’s economic boom in the 1990s.

But China does not have the same resources as a country like Japan to provide a safety net for its aging population. Its households live on much lower incomes on average than in the U.S. and elsewhere. Many older Chinese residents rely on state pension payments as a key source of income during retirement.

China also has some of the lowest retirement ages in the world, with most workers retiring by age 60. The situation has imposed tremendous strain not only on state pension funds, but also on the country’s hospital system.

China introduced the one-child policy in the late 1970s, arguing that it was necessary to keep population growth from reaching unsustainable levels. The government imposed onerous fines on most couples who had more than one child and compelled hundreds of millions of Chinese women to have abortions. Many families favored boys over girls, often aborting baby girls or abandoning them at birth, resulting in a huge surplus of single men in the Chinese population.

China announced the relaxing of family size restrictions in 2013, but many demographic experts said the change had come too late to change the country’s population trajectory.

The government’s efforts to spur a baby boom to solve the demographic crisis — including offering cash handouts and easing the one-child policy to allow for three children — have failed to stabilize falling birthrates. Educated Chinese women are increasingly delaying marriage and choosing not to have children, deterred by the high cost of housing and education.

China has also been unwilling to loosen immigration rules to boost the population, historically issuing relatively few green cards to replenish its shrinking work force.

To address the labor shortage, China has been outsourcing low-skilled production to other countries in Asia and adding more automation to its factories, hoping to rely more on artificial intelligence and technology sectors for future growth.