China’s population slowdown is a ticking time bomb Beijing can’t disarm fast enough

In late April, the Financial Times reported that China’s population was set to fall in 2020 and dip below 1.4 billion people. The next day, China’s National Bureau of Statistics, which had delayed the release of a once-in-a-decade census planned for earlier that month, issued a one-sentence rebuttal that simply said China’s population had, of course, gone up. 

When the bureau released the census figures days later, it stated just that. The number of people living in China increased by 11.7 million, to 1.41 billion, from 2019 to 2020. 

Beijing has good reason to be sensitive about its size. The census figures, while showing an uptick last year, also revealed that China’s population is growing at its slowest pace in decades, resulting in an aging workforce that could jeopardize the nation’s decades-long economic success story. China needs to disarm its demographic time bomb—and quickly—so it’s dismissing any notion that it might detonate sooner than expected.

The census’s delay and the FT squabble fueled speculation that China may have inflated its numbers to avert the perception that its demographic crisis is even worse than it appears. 

But demographer Peter McDonald at the University of Melbourne says the delayed release likely had more to do with how China would handle messaging of the numbers than with doctoring them for political purposes. He says, “I think you’ve got to take the numbers at face value.” 

Still, even at face value, the picture isn’t pretty. The 12 million babies born in 2020 mark China’s fewest births since 1961. Over the past 10 years, China’s population growth has increased at an average rate of 0.53% annually, the slowest per-year uptick since 1953.

With fewer births, China is getting older, and its working-age population is getting smaller. In 2010, 13.3% of people were age 60 or over. Last year, that number hit 18.7%. In 2010, China had 940 million people between 15 and 59 years old; last year it had 894 million. That group made up 70.1% of China’s population 10 years ago; it accounted for 63.4% in 2020. Taken together, those trends mean China faces the prospect of not having enough younger citizens to generate the economic productivity and tax revenue that can sustain the elders’ standard of living.

“It’s clear that the government is increasingly very, very concerned about the future in regard to very low fertility,” says McDonald. In the five-year economic plan released in March, China’s government addressed its demographic crisis with unusual candor, stating it aims to boost birth rates, expand childcare services, and raise its retirement age to counteract its birth rate slowdown.

“We will implement a national strategy for addressing population aging,” Chinese Premier Li Keqiang said at the time.

The strategy is quickly becoming reality. On May 31, China announced plans to relax its two-child policy to three, just five years after the country eased its one-child policy and let parents have two children.

Even if China’s fertility rates tick up in the short term, more babies now may do little do stem a looming crisis. “Already, some of [China’s] social security systems are under pressure,” says McDonald. In 2020, China’s National Social Security Fund, which includes pensions, reported its first-ever annual deficit, of $100 billion. The Insurance Association of China said in November that the shortfall could balloon to $1.5 trillion by 2030 as more seniors enter the pension system.

China’s government realizes its pension system could soon collapse under its own weight. When it announced its new three-child policy, China also said it will gradually raise its retirement age and invest more in its pension system, though it did not provide details on when or how it would implement those measures.

Such a crisis is not unique to China. In fact, advanced economies around the world are trying to counteract falling fertility rates. The U.S. government reported in May that its population is now growing at the slowest pace since the 1930s. Months before, President Joe Biden proposed a $1.8 trillion American Families Plan that would provide more financial relief to parents. In South Korea, which had the world’s lowest birth rate in 2020, President Moon Jae-in announced a new government policy to award parents nearly $3,000 when a child is born and a $275 monthly stipend for the baby’s first year. Japan has the oldest population in the world and in recent years has declared its demographic crisis a “national emergency.”

But the problem China faces is especially acute because sustained, rapid economic growth is fundamental to the social compact Beijing has forged with the Chinese people—prosperity and stability in exchange for some personal freedoms. In the past 40 years, some 850 million Chinese people have been lifted out of extreme poverty, which helped fuel China’s rise as a “labor intensive powerhouse,” says Bruce Pang, the macro and strategy research head at China Renaissance Securities. But the census shows that China can no longer count on its sheer volume of people to propel blistering GDP growth that has averaged 9.1% since 1990. 

Instead, to keep its economy apace, China will have to become more productive, extracting more output from a shrinking number of working-age citizens. Achieving that feat, in the end, may depend on whether Beijing can find enough jobs for its expanding class of college graduates and on its ability to enlist enough robots to pick up the rest of the slack.

A natural solution to China’s crisis would be to reverse the decline in birth rates. But Beijing has already tried that. When it replaced its 36-year-old one-child policy with a two-child policy in 2016, the government didn’t get the baby boom it had hoped for. If Chinese parents were not enticed by the prospect of having two children, China’s new three-child policy may not help reverse China’s falling birth rates either.

Other proposals to incentivize more births, like expanding access to childcare, may do little to improve China’s fertility rates given the lingering effects of China’s former one-child policy, McDonald says. It instilled in Chinese culture a preference for smaller families and led to adult men outnumbering women by 35 million, he said. The rising cost of having kids is also a disincentive; Shanghai and Beijing are now among the world’s most expensive cities for raising children.

Unlike the U.S. or European countries, China cannot count on immigrants to supplement its workforce. China has some of the harshest immigration laws in the world, since the government views new immigrants as a threat to social stability. Only a few thousand foreigners obtain permanent residency each year, and only a tiny fraction ever become fully naturalized citizens.

With China’s population slowdown likely to continue, it must determine how to do more with less. 

The good news for China is that more of its citizens are earning university degrees. 

In the census, China reported that its higher-education rate nearly doubled; 15,467 people per 100,000 citizens now hold either a junior college or bachelor’s degree, compared with 8,930 per 100,000 in 2010. In that same time frame, China’s illiteracy rate dropped from 4.08% to 2.67%.

Stuart Gietel-Basten, a demography expert at the Hong Kong University of Science and Technology, says China’s rising education levels have already created a deep well of human capital for its economy to draw from. College graduates tend to work in technology and other high-value industries, depend less on state benefits, and are often concentrated in more productive urban centers, he explained. 

China’s “potential is there in terms of human capital,” Gietel-Basten says, but education doesn’t automatically translate into productivity, especially if graduates can’t find jobs that require a university degree. That was the case for 26.3% of Chinese graduates in June 2020, according to September data from Chinese job recruitment platform Zhaopin.

It’s clear that the government is increasingly very, very concerned about the future in regard to very low fertility.

Peter McDonald, University of Melbourne

The government must support its university graduates by ensuring their degrees match the needs of the labor market. It needs to improve the quality of Chinese universities and provide additional funding for vocational schools, Gietel-Basten says. 

But if a larger share of Chinese workers are educated and can manage to find white-collar jobs, the country risks confronting a shortage of lower-skilled laborers to run its factories and harvest its fields.

Enter automation. In 2014, Chinese President Xi Jinping called for a “robot revolution.”

By some measures, he got what he asked for. Between 2014 and 2017, China added over 1,000 new robotics firms, according to China’s Ministry of Industry and Information Technology. And for eight years, China has ranked as the world’s top market for robotics equipment, installing 140,500 industrial robots in 2019. Its total is nearly triple that of second-place Japan, which installed 49,900 units, according to the International Federation of Robotics (IFR).  

At times, China has made a show of deploying its robot armies. During the COVID-19 pandemic, robots sprayed disinfectant in streets, delivered medicines and supplies to COVID-19 patients in hospitals, and recorded customers’ temperatures in city malls. In Beijing, diners can go to a fully automated Haidilao hot pot restaurant, where robots cook and deliver orders to each table. China’s state-run broadcaster Xinhua in 2020 introduced an artificial intelligence–driven robotic news anchor that can mimic human voices and facial expressions.

At the same time, China’s automation lags behind other developed economies in other ways.

The IFR reports that in 2019 China ranked 15th globally in “robot density,” a measure of how many industrial robots versus human workers are used in the manufacturing process. China has 187 robots installed per 10,000 employees, the report says. Global automation leaders Singapore and South Korea have 918 and 868 robots installed per 10,000 workers, respectively. The Economist Intelligence Unit ranks China 12th on its Automation Readiness Index, a list of 25 countries that measures how prepared countries are to incorporate intelligent automation.

Even with China’s robot buying spree, its automation drive is “still in a very, very early stage,” says Pang. Deploying more robots in manufacturing will be key to sustaining China’s GDP growth of 4% to 5% each year, since they can make the tasks done by China’s smaller factory force faster and more efficient, Pang says. 

More automation is necessary for China to realize its full economic potential, but it also represents a “double-edged sword” for Chinese policy planners, Pang says. “Automation can lift productivity, but it will also suppress some of the demand for real labor,” he says.

Automation can lift productivity, but it will also suppress some of the demand for real labor.

Bruce Pang, China Renaissance Securities

China boasts some 100 million factory workers, and transferring low-skilled jobs to more productive sectors is not a simple task. In the short term, replacing workers with robots also threatens to exacerbate a problem of providing any jobs to fresh graduates. In 2019, the IZA Institute of Labor Economics found that automation in China lowered worker wages, reduced the flow of new workers to factories, and led to greater instances of unrest. IZA researchers Osea Giuntella and Tianyi Wang noted that China’s labor market might not be ready for such an immediate shock. 

In recent years, China’s top leaders, including Premier Li, have emphasized the need to retrain factory or agricultural workers to work in higher-skilled sectors, but the magnitude of that challenge is daunting. McKinsey estimated earlier this year that China may need to retrain 220 million workers by 2030 to make up for automation and other technologies that will replace jobs. 

China’s slowing population growth poses a domestic crisis, but even without significant gains in productivity, China is set to overtake the U.S. as the world’s largest economy “in the next 10 to 15 years,” says Bert Hofman, director of the East Asian Institute at the National University of Singapore. “And the workers that are going to do that are already born, and most of them [are] already in school.”

But even as the world’s top economic power, China could stumble into the “middle-income trap” that has ensnared South Africa and Brazil, meaning it could tap out on wage growth by failing to transition from an economy that runs on cheap labor to one fueled by innovation.

Economists routinely note that even though China boasts the world’s second-largest economy, it is not wealthy in terms of per capita GDP—$8,242 per person in 2019, according to the World Bank. The average global GDP per capita is $11,057; in the U.S., it’s $55,753. 

If China doesn’t divert from its current path, its economic growth and social safety net will be at risk, says Gietel-Basten. “It’s going to be very problematic.” 

Still, China has an advantage over some of its peers that are democracies facing the same challenge. “China’s political system is much better suited to deal with these big long-term structural changes,” Gietel-Basten says, “because they don’t have to worry about going back to the electorate every three or four or five years.” 

Going gray

With its population growth sinking to the lowest rate in decades, China is aging, and its working-age population is shrinking:

12 million

Babies born in China in 2020 (The country’s fewest births since 1961)

18.7%

China’s population age 60 or older, up from 13.3% in 2010

63.4%

China’s population ages 15 to 59, down from 70.1% in 2010

$8,242

China’s per capita GDP, which trails world average of $11,057

Sources: China National Bureau of Statistics, World Bank

A version of this article appears in the June/July 2021 issue of Fortune with the headline, “China’s ticking time bomb.” This version has been updated to include news about China’s three-child policy.