How China can turn its demographic challenge into economic edge

CHINA stands on the verge of a profound demographic shift. With an ageing population and mounting economic uncertainty, the government’s recent decision to raise the retirement age by up to five years is a bold move designed to avert what many fear could be an impending crisis. Yet while this policy addresses immediate concerns, it also points to a deeper issue – one that extends beyond shrinking workforces and pension deficits.

The true test for China lies in boosting labour productivity. Raising the retirement age is merely a stopgap for its strained pension system, which is projected to run dry by 2035. Several regions, particularly in China’s industrial northeast, rely heavily on subsidies from wealthier coastal provinces to maintain pension payouts.

While raising the retirement age is expected to reduce the pension shortfall by 20% in the next decade, these transfers will become increasingly unsustainable as wealthier provinces face ageing populations of their own. As such, the real challenge is not just expanding the workforce but improving how efficiently labour is used.

Labour productivity – the amount of output per worker – is shaped by several factors, all of which are now crucial to China’s economic future. The term “new productive forces”, increasingly emphasised by Chinese leaders, reflects this vision and aims to lay the groundwork for “high-quality development”.

This concept refers to the integration of human labour with advanced technology and infrastructure – key elements that, as China’s President Xi Jinping has said, will “guide the building of a modernised industrial model”.

To sustain growth despite demographic challenges, China must boost total factor productivity, which measures the efficiency of both labour and capital. Technological innovation is a critical driver of productivity.

Automation and artificial intelligence are transforming industries, particularly in manufacturing and logistics, where robots are already taking over repetitive tasks. This enables older workers to stay productive longer by focusing on higher-order skills.

In knowledge-based sectors, AI assists in areas such as data analysis and healthcare, enabling experienced professionals to maintain or even enhance their output. By integrating AI and automation into its economic fabric, China can extend the productive years of its workforce and increase the overall efficiency of labour.

However, technology alone is not enough. Capital investment in better tools, machinery and infrastructure is equally crucial. In industries where physical strength once dictated productivity, modern machinery and tools can enable older workers to remain competitive.

This shift is already visible in sectors such as construction and agriculture, where advancements reduce the need for young, physically capable workers and allow experienced older workers to take on supervisory or knowledge-intensive roles.

The third crucial component is human capital development. Productivity gains hinge on how well workers are educated and trained to adapt to technological advances.

As China transitions towards more knowledge-based industries, investing in education and upskilling will be essential, especially as older workers remain in the workforce for longer.

Retirement age reform must be coupled with initiatives in vocational training and lifelong learning to ensure workers stay employed longer and contribute more effectively.

China can draw lessons from other economies as it addresses these challenges. For instance, Japan faced similar demographic pressures in the 1990s but maintained productivity by embracing automation and extending the retirement age.

Similarly, Germany transitioned from labour-intensive sectors to high-skill industries by investing in vocational training and workforce development.

While China’s scale and structure are unique, these examples can offer a blueprint for how adopting new technologies and human capital development can sustain productivity in the face of demographic shifts.

Efficiency improvements and specialisation are also crucial drivers of productivity growth. By refining workflows and eliminating inefficiencies in sectors such as healthcare and services, China can achieve substantial productivity gains. Simultaneously, deeper specialisation – focusing on areas where China has a competitive advantage – combined with strategic outsourcing can further optimise labour use.

Despite these potential gains, China faces significant headwinds. Youth unemployment surged to 17.1% in July, underscoring the growing challenge of creating sufficient opportunities for the younger generation.

The labour market faces the dual burden of managing an ageing population while finding productive roles for young workers. State-owned enterprises could see reduced vacancies as older employees remain in the workforce longer.

Adding to the challenge, China’s overall labour productivity has slowed. Productivity growth fell to 4.2% in 2023, down from 7.7% in 2013, and dropped by 4.3% year on year in December 2023.

This decline underscores the difficulty of maintaining productivity amid structural economic shifts. While technological advancements and capital investment offer hope, these tools must be wielded effectively to reverse the trend.

Beyond retirement age reform, China is also trying to balance the needs of both its younger and older workers. Only half of China’s provinces reported pension surpluses last year, reflecting the strain on the pension system and the urgent need for additional reforms, including better pension management and increased government investment.

China’s ability to navigate its demographic shift will define its economic future. Raising the retirement age is only the beginning. True success will come from harnessing the full potential of its workforce by integrating advanced technology, refining labour practices and investing in human capital.

As China confronts the challenges of an ageing population, the path forward lies in boosting productivity across all sectors and age groups. If executed effectively, this shift will transform what many see as a looming crisis into a powerful opportunity for sustained growth and global competitiveness. — SCMP