Is China’s great labour advantage cracking?

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After six decades of continual growth, China’s population has finally begun to decline after holding its place as the world’s most populous country since UN records began in 1950.

China’s 2022 population of 1.4 billion is down 850,000 from the year before, a decline that analysts expect to accelerate, with the country expected to yield its top spot to burgeoning India this year.

But economists are now concerned about the decline of China’s labour resources, which have been the primary factor of production that lent the nation its comparative advantage and subsequently been integral to its economic success.

Analysts foresee China’s competitively priced products likely fading and, according to Tim Harcourt, Chief Economist of IPPG at UTS, “China can no longer rely on a reserve army of labour.”

As China experiences low birth rates, low death rates and a decreasing total population, the average age of the population has risen, which has both pressurised the struggling pension system and decreased the number of taxable citizens.

The effect it has already had is unclear. Senior Market Analyst of City Index, Matthew Simpson, maintains: “It is difficult to say with certainty the impact a multi-decade demographic cycle has on an annual GDP report, especially with all the moving parts of 2022 offered amidst raging inflation and prolonged lockdowns. But we know it will be a problem in the years and decades to come.”

Simpson expects that recently implemented policies, such as three children per household, younger admittance to kindergarten, longer parental leave, and stricter abortion rules, should slow the depopulation rate.

Nevertheless, the effects of the One Child and Two Child Policies remain, having officially held birth rates below the replacement level of 2.1 babies per woman. The Chinese government has estimated 400 million births were prevented because of these measures.

However, the inculcation of small-family culture may have had a greater effect, according to Simpson, who is “doubtful that [Chinese birth incentives] are enough to change the nation’s psyche and provide the short-term population burst the government seeks.”

Combating an aging population is firmly on China’s agenda, yet economists believe a more dynamic shift may be required.

While other analysts see automation as an area China will likely depend more on in future, replacing the need for menial and low-skilled labour through technological innovation. Harcourt asserts a “loosening of the social credit system and opening of the labour market” would be especially beneficial. An extension of existing systems, such as “relaxation of immigration policies with incentives for foreigners”, has also been heralded as a more immediate solution by Simpson. He further insists that a more fluid and efficient approach is necessary to ensure China’s continued prosperity. Whatever the approach, “demographics are a tough ship to turn, and reversals are decades in the making.”

So, what should Australia take from this situation?

First is the recognition of opportunity; although Australia’s largest trading partner may seem like it is coming under duress, Harcourt believes “this is a trade opportunity for Australia, especially in health care and aged services, and in education and childcare services.”

 Although such optimism is reassuring, the global economy is not what it once was. Simpson expects that “with China’s demographics having hit a turning point and commodity prices and inflation high by historical standards, Australians can no longer rest on their laurels and expect trade with China to cushion economic blows in the future – as it did during the 2008 global recession – [and] it is probably time Australia weaned itself off its dependency on China’s trade.”

Simpson also warned that the: “constant roadblock for Western economies such as Australia is their short-term political cycles and infighting with the opposing parties. If the likes of China – who have 100-year objectives – struggle with demographics, surely it is no easier for governments that look ahead in short spurts.”

Despite this demographic concern, China is still a giant and, as predicted by a Goldman Sachs research note, “[whilst] structural headwinds from … the aging population … remain valid, they don’t disqualify [the] view that China looks well positioned across the growth, policy, and inflation cycles in a global context in 2023.”

China is poised to continue strongly, yet adaptions are required, “Population is important, but it’s not everything. Participation and Productivity matter more,” says Harcourt.