China’s plummeting fertility rate: a family affair or national concern?

Viewpoints from Jianzhang Liang, population economics expert and co-founder of Trip.com Group

In 2022, China's population decreased by 850,000, marking its first decline in decades and the start of negative population growth. This trend accelerated in 2023, with a reduction of 2.08 million, leading to the lowest birth rate since 1949.

The plummeting birth rate remains a long-term economic and societal challenge for China, which has significant implications for its economy and growth potential. Although the government is struggling to encourage childbearing to boost the birth rate, the results are undesirable due to various factors, such as widespread contraception use, increased female labor force participation, considerable time constraints from modern entertainment activities, soaring costs of raising children, and the expansion of social security for the elderly.

In today's post, we will present the insights proposed by Jianzhang Liang, the co-founder of Trip.com Group, China’s largest OTA (online travel agency) platform. He is an expert in population economics and entrepreneurship innovation research and a professor of economics at Peking University. Liang was also among the first to call for and promote population policy reform in China. He has published works such as Population Innovation Power. In the latter part of today's post, Liang suggests addressing China's shrinking population by implementing practical population policies to create a supportive environment for families and the nation. These policies have the potential to stimulate consumption, boost the economy, and ensure both short-term and long-term benefits.

Notably, some of his suggestions also appear rather progressive in today’s China, such as hiring foreign nannies to take care of their children (which is currently not allowed under China's law), canceling the middle school entrance examination, shortening the education period (which fundamentally challenges the exam-based talent selection education system in China), and guaranteeing the rights of single-parent families.

Below is Baiguan's translation of the original article:

China’s plummeting birth rate: a family affair or national concern?

Abstract

On January 17, 2024, the National Bureau of Statistics released the population data for 2023, which revealed a population of 1,409.67 million and a decrease of 2.08 million compared to the previous year. In 2023, there were 9.02 million births (birth rate: 6.39 per 1,000 people) and 11.10 million deaths (death rate: 7.87 per 1,000 people). The natural population growth rate stood at -1.48‰. The number of births in 2023 reached the lowest level since 1949, and the birth rate hit a record low. The total fertility rate (TFR) is approximately 1.0, less than half of the replacement level. This rate is one of the lowest globally (slightly higher than South Korea), significantly lower than the average level (around 1.5) of developed countries, and sharply lower than Japan, which is experiencing a population crisis in birth rates, at 1.3.

Factors influencing China’s plunging birth rate

The birth rate in China has experienced a significant decline in recent years, positioning it as one of the countries with the lowest birth rates globally. However, China's remarkably low birth rate can be attributed to the worldwide plummeting fertility rates observed in many countries over the past few decades. Factors influencing this are multifaceted, including widespread contraception use, increased female labor force participation, significant time constraints from modern entertainment activities, soaring costs of raising children, and the expansion of social security for the elderly. As a result, it is a common phenomenon that as countries experience economic development, their birth rates tend to fall. Developed countries generally have lower birth rates compared to developing countries. However, China's birth rate is even lower than expected based on its level of development compared to other developed countries. This raises the question: why is this the case? In addition to the birth restriction policy implemented in China, there are several other factors contributing to the lower birth rate compared to other countries:

First, the unified examination and admission system for China's middle school and college entrance exams has triggered a highly competitive education system, placing significant financial and mental burdens on parents and students. Second, housing prices in China's major first-tier cities rank among the highest globally, with China accounting for half of the top ten cities with the highest housing prices worldwide. Lastly, China has not yet fully implemented comprehensive policies for maternity grants. Developed countries typically allocate 1% to 3% of their GDP to provide family welfare, including cash benefits, tax exemptions, and inclusive childcare services.

The aforementioned factors contribute to China having one of the highest costs of raising children in the world relative to income. According to the "China Child-Rearing Cost Report 2022" published by YuWa Population Research [Baiguan: a think tank dedicated to the analysis of population trends and related public policy issues], the average cost of raising children aged 0-17 in the country is 485,000 yuan, with major cities reaching close to 1 million yuan. When comparing the cost of raising a child until they reach the age of 18 as a multiple of the per capita GDP, Australia is 2.1 times, France is 2.2 times, Sweden is 2.9 times, Germany is 3.6 times, the United States is 4.1 times, Japan is 4.3 times, and China is 6.9 times. If the issues of child-rearing cost and welfare are not addressed, China's fertility rate will continue to remain low. Consequently, the country will face the most severe aging population and plummeting birth rate globally.

China's population forecast

According to the "China Population Forecast Report 2023" published by YuWa Population Research, without effective birth welfare policies, China's birth population is projected to drop to below 7 million in a few years, below 5 million by 2050, and less than 1 million by 2100. Currently, China's birth population is only half of India's, and it will be just one-third of India's by the mid-21st century and may be less than one-fourth of India's by 2100. The report also predicts that China's population will decline to 1.17 billion by 2050, and China's share of the world's total population will drop to 4.8% by 2100. This means that China's total population could be surpassed by countries like the United States, while its share of the world's birth population will be less than 1%. This trend indicates that the population advantage accumulated by the Chinese nation over thousands of years will be lost within a century. Consequently, the issue of low birth rates or the crisis of plunging birth rates is the most challenging problem to solve. It is worth noting that due to population inertia, the decline in the total population will lag behind that in the birth population, thus not promptly reflecting the severity of the population decline and its profound impact on the economy and society. Our estimation suggests that encouraging childbirth will require approximately 4% of the GDP in order to gradually increase the birth rate from around 1.0 to 1.4, which is close to the average birth rate level of developed countries.

Chinese childbearing: a family or national concern?

A family should have the freedom to decide the number and timing of their children. It is important to respect their choice and refrain from imposing any mandates on childbearing. Therefore, having children is primarily a personal matter for each family. In today's modern society, where social security systems support the elderly, the traditional notion of "raising children for old age" is no longer the primary motivation. Additionally, the soaring cost of raising children has made the choice to have children a selfless act. However, if everyone only considers their own interests, there may be a plummet in the number of children, which can have significant consequences for society as a whole. This situation resembles the well-known prisoner's dilemma.

Thus, having children is not only a family matter but also a national issue. The current challenge lies in the conflicting interests between the family and the nation. To deal with this conflict, the government should provide generous financial support to families as a recognition of their contribution to society through childbearing. This will help reconcile the interests of the family and the nation.

A country can face numerous negative consequences due to a low birth rate. Over time, this will intensify the aging of the population, leading to a persistent decline in the workforce compared to the number of elderly individuals requiring support. As a result, there will be increased costs for elderly care and taxes throughout society. It is evident that China is expected to become one of the countries with the highest proportion of the aging population and burden of elderly care in the next 20 years. Moreover, this situation will continue to deteriorate, significantly impacting the fiscal health and economic vitality of the country.

The size and composition of a country's population play a crucial role in its level of innovation. A large domestic market and a talent pool are essential prerequisites for fostering innovation. Particularly in the realm of advanced technology, a larger population translates to increased investments in research and development. In the era of AI and the internet, having a substantial customer base and access to vast amounts of data provides an inherent advantage for training algorithms. Consequently, it is not surprising that the United States surpasses Europe in the fields of Internet and AI, while China has also leveraged its expansive market and talent pool to cultivate high-tech companies that rival those in the United States.

Many ambitious technological projects, such as large-scale aircraft, high-speed rail, and semiconductors, can only be undertaken by populous countries capable of competing globally. However, my research suggests that in aging societies, opportunities for young people to thrive are diminished, leading to a decline in their innovative and entrepreneurial drive. Therefore, while China's current innovation capabilities may be on par with those of the United States, its ability to innovate will be significantly hampered as its young population decreases and society ages. This challenge is further compounded by the United States' efforts to impede and suppress China's technology industry, which will greatly reduce China's capacity to withstand economic pressure. Consequently, China's economic prospects will be severely impacted, ultimately affecting the future income of every individual.

Having children is both a personal and national concern. For every Chinese citizen residing in the country, national affairs have a tangible impact on their income. This impact will also affect future generations, as it takes over twenty years for a child to grow up, become a taxpayer, and contribute to innovation. Although this delayed effect is unavoidable, it will inevitably bring potential challenges. To prevent China from facing economic and innovation challenges in the next two decades, it is crucial to increase the fertility rate promptly. Therefore, there is an urgent need to implement a comprehensive fertility welfare policy to address this complex issue.

Therefore, the country should adopt practical policies to alleviate the burden of raising children for couples during their childbearing years. This article concludes with ten suggestions for birth benefits policies. Currently, only a few local governments have implemented birth support policies, which is inadequate. Birth welfare policies should be implemented more effectively at the national level for two reasons. Firstly, most local governments lack the financial resources to provide subsidies for childbirth. Secondly, local governments may not necessarily benefit from an increase in birth rates, as children may grow up and work in other regions, contributing to the entire country rather than just their local area. Neither local governments nor businesses can bear the responsibility of increasing the birth rate. Only by implementing birth support policies at the national level can we achieve the necessary capacity to increase the birth rate.

Would it be excessive to provide each family with a reward of one million yuan?

The bonuses for childbirth encompass various financial incentives, including cash rewards, tax deductions, housing subsidies, and welfare support for childcare facilities. Successful cases in developed countries, such as the Nordic countries, have shown that allocating more than 2% of the GDP towards childbirth benefits has led to higher welfare and birth rates. East Asian countries can learn from this approach. Considering that education and housing are the main costs associated with childbirth in China, it may be necessary for China to allocate 4% of its GDP towards providing childbirth benefits in order to achieve the average birth rate of developed countries. If 4% of the GDP (5 trillion yuan) is allocated annually and distributed to each family, it can provide over 1 million yuan in childbirth benefits to two-child families from the birth of the child until they reach adulthood. Undoubtedly, the specific details regarding the distribution period and format will need to be determined.

One million may seem like a substantial amount, but it represents a significant financial burden for families. According to the “China Child-Rearing Cost Report 2022" published by YuWa Population Research, the average cost of raising a child until the age of 18 is approximately 500,000 yuan nationwide and around 1 million yuan for families residing in major cities. These costs are expected to increase in the future due to escalating prices and education expenses. When we divide the 1 million yuan over a span of twenty years (240 months), it amounts to just over 4,000 yuan per month, covering the direct expenses of child-rearing. In addition to the direct financial costs, families face significant time and opportunity costs. Therefore, it is crucial for the government to assist families in bearing these direct financial burdens entirely.

Can China allocate 4% of its GDP to provide child-related welfare? It is feasible to allocate less than 4% of GDP growth annually. Moreover, China has a significantly higher savings rate and investment rate than other countries and regions, with an increase of 10-30 percentage points. Where does this high investment rate go? It is invested in various fixed assets such as infrastructure, factories, and houses. In the past, the rapid development of urbanization and manufacturing in China partly benefited from the very high investment rate. However, China's current demand for infrastructure and factory construction is approaching saturation. The current challenge lies in identifying promising investment projects, which can be easily directed towards developing human resources.

The Chinese economy is currently experiencing a decline in investment and consumption demand. If families are given trillions of yuan, it will simultaneously stimulate consumption. The spending related to children can drive growth in the real estate and durable goods sectors. Having an additional child often requires purchasing a larger house and a bigger car, which can effectively boost current consumption demand. Additionally, a higher birth rate and a larger population can lead to more optimistic long-term prospects for the Chinese economy, increasing investment confidence across various industries. The Chinese economy not only has the capacity to provide 5 trillion yuan but also greatly needs 5 trillion yuan to spur consumption and investment. Investing in children is the most beneficial choice for the current Chinese economy. It can not only address short-term economic crises but also contribute to the long-term competitiveness and innovation of the Chinese economy.

In terms of implementation, in the short term, monetary policy can be used to provide financial support through the central bank. Currently, the Chinese economy is in great need of proactive fiscal and monetary policies. In the long run, funding for fertility welfare comes from national taxation, and one may question the fairness of this system for individuals without partners and couples without children. However, it can be argued that it is fair because the future contributions of children to society's taxes and social security will benefit everyone, including those without children. The current tax system and pension system already provide subsidies to those with children, and providing fertility welfare simply corrects this inequality. Moreover, this welfare addresses the dilemma faced by a society with low fertility rates and will contribute to overall economic growth.

Conclusion

China‘s plunging birth rate is a hard nut to crack, leading to a rapidly aging population and potential long-term consequences such as economic stagnation, reduced innovation capacity, and even the decline of national strength. To tackle this issue, it is crucial to increase policy support for childbirth and make it more affordable for ordinary families to have and raise children. The estimated fiscal expenditure required for these policies is around 4% of GDP, which is necessary given that China's low birth rate problem is among the most severe in the world. By implementing robust childbirth support policies, we can invest in the future and ensure both short-term and long-term benefits.

Children are a valuable investment in the current Chinese economy. China faces challenges such as plummeting birth rates, weak consumption, and excess production capacity. By providing financial support to families with children, the economy can be stimulated, creating a mutually beneficial situation. In the short term, subsidizing fertility welfare expenses helps boost consumption, generate employment opportunities, and foster economic development. In the long term, supporting childbirth contributes to the development of human resources, improvement of the pension system, bolstering confidence in China's economic progress, and revitalizing China's innovation and overall national strength. With active investment in children and the resolution of the low birth rate issue, the long-term growth prospects of the Chinese economy will remain promising.

Specific ten suggestions for Chinese fertility welfare policies

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