China's Population Crunch
Is the world's most populous nation undergoing a bigger transition than we think?
People are fond of grand geopolitical narratives, and I’ve noticed how often the median voters preferred narrative tends to be a couple of decades out of date. The first time I remember really hearing about China’s ascendency was around 2010 (people have been talking about China’s rise for a lot longer, but I was a child at the time). Funnily enough, now that a decade or so has passed and the idea that China will be globally dominant has saturated the population, I’m beginning to doubt this story.
There is no doubt of course that China is one of the great success stories of the modern world. From a country in absolute poverty, wracked by millions of deaths due to a cataclysmic agricultural transition, it has risen as perhaps the second most powerful country on Earth. Let’s look at the numbers:
China is the most populous nation on Earth, with a supposed 1.42 billion people, in league with no other country except for India’s 1.41(!) billion
Nearly 800 million people have been lifted out of poverty in China in the last 40 years, representing the greatest reduction in poverty in human history
China has the second-highest GDP on Earth, at nearly $20 trillion this year
China has sustained annual GDP growth rates of around 6-14% this century (excepting 2020), and has been projected to overtake US nominal GDP before 2030
China’s annual military spending is $230 billion, making it the 2nd largest by expenditure and by some measures the 2nd most powerful.
By these numbers it is understandable why the pundits are still bullish on China. But there’s another story that is becoming increasingly apparent: that of Chinese precarity. This narrative paints a more ambiguous picture of China’s future on the world stage, and is worth examining on its merits. It all starts with China’s demographics.
China’s fertility rate has been dropping for a long time.
What’s remarkable is actually how long it’s been below replacement rate. They just had such a combination of population glut and catch-up economic growth that it didn’t matter until now. Also, colour me skeptical that the UN’s median fertility projection ends up being accurate, given that weird plateau above - but we’ll talk about the UN’s data in a moment.
Here’s China’s population, again according to the UN.
This chart marks one of the most rapid, stunning demographic collapses we have seen: faster and more drastic than Japan which is often seen as the poster child for ageing population. But even Japan has started increasing immigration, whereas China will struggle to do so with a longstanding net-negative immigration figure. According to the UN, 2022 is the year that China’s population peaked.
It looks even more dire when we examine China’s working-age population.
That’s a loss of 300 million workers in the next 40 years. To counteract this, China would either have to engage in the most impressive fertility-incentive scheme that we’ve ever seen, the most ambitious immigration scheme we’ve ever seen, or crank their labor productivity up from its currently disappointing level to stratospheric heights. This crisis also leads to a grim dependency ratio as mass retirement begins without enough young people to support them.
To put all of this simply, China was able to leverage a historically massive workforce to become the factory of the world. Now, thanks to the one-child policy which drastically accelerated normal fertility drops as countries develop, China is facing a population slump which will reduce the scale of its economy, and consequently its ability to remain the ‘next superpower’.
But here, I have a question: how reliable are these UN figures? There are substantial arguments going on right now about China’s demographic data, many triggered by an apparent data leak out of Shanghai Police Department.
Now, this is so extreme as to startle even a seasoned data analyst. The claim is that China’s population peaked four years ago (though others are still arguing that the peak won’t come until 2025) and that the country currently has 140 million less people than official accounts. On its face, these numbers are very difficult to believe. And indeed, there are doubts as to the veracity of this leak. But regardless, we do have good reasons to believe that the CCP fudges data on figures like population and economic growth, which means that the UN estimates which rely at least in part from Chinese data are ultimately unreliable. It is very likely then that China’s population is already shrinking and is smaller than the reported number, though we can’t say by how much. We can be bolstered in this prediction by the poor track record of official bodies like the UN in estimating Chinese population growth for many years now. Even in 2019, the UN’s reports were claiming that China’s population would peak in 2031, before scaling this claim back by a decade just a couple of years later.
These numbers mean that any concern we had about an ageing China is brought forward in time, giving the country less time to prepare. When we combine this demographic problem with the housing crisis and COVID lockdowns still gripping the nation, it’s easy to see why prediction markets have continued to be more sceptical than the public on an overwhelmingly dominant China going forward.
So it’s clear that we are seeing two radical narratives at play. One is saying that by mid-century China will have a runaway lead on the world economy, enjoying more than double America’s GDP and clear economic, cultural, and military superiority. The other narrative is that… well:
I notice that I’m confused by the radical divergence in opinions on this that I see from very smart people. But, insofar as there is a trend in intellectual circles, it seems to be that we have underestimated the headwinds that China now faces. In the early 2010’s we saw China’s growth rate drop seemingly permanently into single digits, and that trend appears to be continuing, marking a slowdown in catch-up growth that is occurring much earlier in China’s development than it did for other countries like Japan and South Korea.
So is China a rising power? No, I think that this view is 20 years out of date. And is China ‘finished’ as Zeihan puts it? No, I find it difficult to believe that demographic issues and economic slowdown necessarily lead to total collapse (though of course they can). It sounds lame to say but I think that both narratives are probably overzealous. China is still massive and immensely powerful, and will keep growing at some given rate. But this information does cause me to update downwards a bit on Chinese power in the coming decades. China will probably overtake the USA in GDP but it’s hard to see them gaining a decisive lead, or even reaching near to American GDP-per-capita. That would require some kind of disjunctive development in Chinese power like advanced artificial intelligence which I don’t view as very likely.
The best and most persuasive resource that I’ve found on the cracks in the rise of China is this comprehensive report from the Lowy Institute. I really do think that this title captures the most believable version of this story: Revising Down the Rise of China. To quote directly from their conclusion:
Our analysis suggests that expectations regarding the rise of China should be substantially revised down compared to most existing studies and especially expectations amongst those considering the broader implications of China’s rise for global politics. Of course, given its population size and notional scope for productivity catch-up, a future world economy dominated by China cannot be completely ruled out. But it would require an enormous degree of success with productivity-enhancing reforms well beyond China’s track record to date. It should not be the baseline expectation.
The legacy effects of China’s uniquely draconian population policies and heavily investment-driven growth model imply substantial structural growth deceleration is likely, even assuming a significant degree of broad policy success. Moreover, China faces substantial downside risks not formally incorporated into our baseline analysis, especially the potential for negative feedback loops between decelerating growth and underlying financial vulnerabilities. Our projection of substantially slower future growth therefore remains a somewhat optimistic assessment. Overall, our analysis suggests China will still most likely become the world’s largest economy by any measure by around 2030. But its size advantage over America would be slim and it would remain far less prosperous and productive per person than the United States and other rich countries, even by mid-century.
How could China respond to these problems? There are five strategies:
Increase total factor productivity through industrial reform and other means (unlikely while Xi remains in power). Relatedly, China could double down on increasing automation as a factor in this overall productivity increase.
Incentivise fertility through financial programs (there are reasons to think that this is quite expensive to do properly)
Increase immigration (fairly unfeasible given the population size they will have to replace, though they could probably steal from surrounding regions with enough incentives).
Solve ageing.
Create China-specific growth through the development of disjunctive technology.
I don’t view most of these as plausible solutions short-term. In the medium-term, these last two points become potentially more plausible. But I think that we run into really big problems when trying to predict that far into the future, due to our failure to account for disjunctive technologies. Ultimately, though I have tried to focus on demographic and economic analysis in this post, when people say “China will be doomed by 2050 because their population will be much lower” I feel like asking “why do you think that will be relevant by then?”
In 2050, we could have destroyed the world, or ended the need for human economic activity through the use of advanced artificial intelligence. Or some other, stranger thing. So yes, revise down the rise of China. But also revise down your confidence that the future will be anything like the present.