Before 1978, China’s policies kept the economy poor, stagnant, centrally controlled, inefficient, and relatively isolated from the global economy.
Since the country began to open up and reform its economy, over 800 million people have been pulled out of poverty as a result of GDP growth of nearly 10% each year.
According to a report from CRS, a Congress’s think tank, the World Bank describes the pace as “the fastest sustained expansion by a major economy in history.”
The fast growth pace also turned China into the largest U.S. merchandise trading partner, the biggest source of imports, and the third-largest U.S. export market.
What are the crucial points in China’s fast pace of economic development?
Large-scale capital investment
According to the report from CRS, one of the two main factors that contribute to China’s economic growth is large-scale capital investment. Large-scale capital investments are financed by large domestic savings and foreign investments.
According to the research, China has become a large recipient of global foreign direct (FDI) as well as a major provider of FDI outflows, citing the United Nations Conference on Trade and Development (UNCTAD)
The foreign direct investment totaled 139 billion dollars in China in 2018.
Foreign-invested enterprises (FIEs) account for a major portion of China’s industrial output. This figure rose from 2.3 percent in 1990 to 35.9% in 2003.
Furthermore, these companies account for a major portion of China’s overseas commerce.
Moreover, China Briefing reported that foreign-invested enterprises have contributed nearly 50% of China’s foreign trade, although they are less than 3% of Chinese companies in number.
The Chinese workforce has been one of the factors attracting foreign companies.
In 2010, around 445 thousands FIEs were registered in China, employing 55.2 million people, or 15.9% of the country’s urban workforce.
According to a report from the Institute of Labor Economics (IZA), the Chinese adhere to Confucian-based work values such as hard work, endurance, collectivism, and personal networks. Therefore, Chinese workers should be dedicated, responsible, and industrious. They are expected to align with the company’s values and goals.
As a result, lengthy work hours are prevalent in China. They may be the reason why the country’s economy has done so well since the economic reform of 1979.
As mentioned in the report, Chinese workers’ health appears to be unaffected. It’s possibly because a deeply ingrained culture of extended work hours makes Chinese workers more resilient than Western workers.
Other countries, especially the U.S., have been showing attention to the Chinese labor workforce.
According to CNBC, companies from the United States establish factories in Chinese industrial parks, employing Chinese workers at a fraction of the cost of an American worker.
In addition, CNBC reported that jobs lifted in the U.S. lift people out of poverty. That’s why China gained wealth.
The biggest problems of China’s economy
An aging population
In recent years, China has been encountering problems with the labor workforce regarding their age and labor cost. It brings some adverse impacts on the economy.
The aging population is the biggest problem for China’s economy. Financial Review estimates that the country’s population aged 65 will rise from 200 million to 400 million by 2049. Even worse, the population aged over 85 will be over 150 million in 2049, from fewer than 50 million today.
Data from Statista, the median age of China’s population, has risen steadily from around 20 years in 1970 to around 37 years in 2015. The median age in 2025 is expected to be around 40.
In recent years, China’s labor force has shown a general downward trend. China’s labor force was estimated to be around 784 million people in 2020.
Because both the working-age population and the proportion of the population participating in the labor market are declining, this downward trend is likely to continue in the foreseeable future.
With aging, shrinking population, if China wants to maintain stable economic growth, it must boost productivity growth.
As a result, efforts to increase productivity levels would become even more critical for future economic growth.
One-child policy to blame
The Chinese one-child policy is the key reason for the shrinking labor force. The policy was revoked in 2016.
As a socio-economic consequence, this policy lowers the chances of having multiple children, as many studies show.
Professor Yuyu Chen at Peking University, and his colleagues wrote a report entitled “Little Emperors in the Workplace: Labor Market Consequences of China’s One-Child Policy.” They mentioned some examples in the report.
Both McElroy and Yang’s studies in 2000 and Ebenstein’s study in 2010 found that higher penalties discourage fertility. Meanwhile, in a 2017 study, Li and Zhang discovered a significant effect of the possibility of not having a second child.
In addition, a 2021 study found evidence of a significant reduction in fertility.
Another reason that may lead to an aging population is the unwillingness to have children from Chinese youths.
The South China Morning Post (SCMP) cites national data that China’s fertility rate fell to 1.3 children per woman in 2020. A rate of less than 2.1 usually indicates a population decline.
SCMP reported that there has also been serious resistance to the public push to encourage young adults to start families. Gen Z women are increasingly seeking diversity and individuality in their lives. Marriage is no longer a priority.
For example, 25-year-old Janet Song doesn’t believe that having a husband or a child will help her succeed. She added that marriage and childbirth make life stressful for young people.
Another possible reason for the lower population rate is the “lying flat” or ‘tang ping’ trend among Chinese youths. According to SCMP, it represents the mindset of laying down rather than being a productive member of society.
Liu Xin works as a creative director for an advertising agency. She said that many of the young people were the only children at home. They seek an easy life. Therefore, “lying flat” is common among young women. It is not only about work but also about marriage and children.
SCMP also cites information from a survey in October. Among around 2,900 unmarried urban residents aged 18-26, almost 44% of women said they had no intention of marrying or were unsure if they would.
According to Statista, China will face significant challenges due to an increase in elderly people and a lack of young people in this century. Moreover, the aging population will put a strain on China’s social welfare system and may alter the country’s economic situation.
The first challenge is shortages in the workforce.
Visual Capitalist, an online publisher, reported that China’s aging population poses a long-term danger to economic growth as its workforce shrinks and low fertility rates. It results in fewer babies entering the working-age population. Workforce shortages consequently result in lower total consumption, a greater burden on aged care, and slower economic growth.
Another challenge regards higher wages which also causes difficulties for foreign companies in hiring.
As mentioned on Statista, China’s average wage climbed to around 14,450 dollars in 2020, up from around 5,500 dollars in 2010.
According to this data provider, wage increases also make the labor force less appealing. As a result of rising labor costs and the trade war between China and the United States, many companies are shifting their investment destinations, particularly in the manufacturing sector.
Under current economic uncertainties, China’s “996 culture of overwork.” also affects the mindsets of Chinese youths.
While the Chinese government promises a better future and a better life for residents, workers are now required to work from 9 a.m. to 9 p.m. six days a week and struggle to buy a home, let alone strike a work-life balance.
As a result, the phrase “lying flat” is more of a call to inaction than a call to action. When Chinese youths decide to lay flat, it may affect the economy.
SCMP cites Gavin Sin-Hin Chiu, a Hong Kong economist and historian. He said the trend was more concerning in China than in other countries because China’s economic development is not as advanced as in other countries.
An increase in labor costs, workforce shortages, and the “lying flat” trend of Chinese youths might reduce companies’ interest in investing in China.
China Briefing spoke to Kyle Freeman, partner and head of the International Business Advisory team in North China. According to Kyle, one of the most difficult parts of running a factory in China is the labor shortage and the consequent increase Kyle Freeman – | China Briefingse in wages required to attract or keep workers.
He stated that firms were increasingly seeking automation and alternate production destinations to China for their purposes.