Originally published at Project-Syndicate | Jul 7th, 2023
Although China is on the verge of escaping the dreaded “middle-income trap,” it is aging fast and facing significant economic headwinds as a result. After underpinning the unbalanced and ultimately self-destructive economic relationship with the United States for decades, the one-child policy will continue to exact a toll.
MADISON, WISCONSIN – The deterioration in US-China relations is ultimately due to the bilateral trade imbalance and to US frustration with Chinese politics. Both can be traced back to China’s one-child policy, which was in place from 1980 to 2016.
When Western leaders welcomed China into the World Trade Organization in 2001, most assumed that they were creating the conditions for eventual democratization. A growing Chinese middle class, they assumed, would demand greater accountability from the government, ultimately creating so much pressure that the autocrats would step aside and allow for a democratic transition. This political fantasy underpinned the Sino-American relationship for decades.
But it wasn’t to be. The Communist Party of China (CPC) has been regressing on all fronts, reasserting more top-down control over the economy and tightening censorship and other forms of social and political control. It has been led down this path by the legacy of the one-child policy, which fundamentally reshaped the country’s demographics and economy.
BIG GOVERNMENT, WEAK “LITTLE PLATOONS”
Because all parents want the best for their offspring, children’s consumption naturally supports a massive industrial value chain. Embodying economic hope for the future, children boost consumer confidence as well as many forms of investment. But when they come to account for a smaller share of the population, insufficient consumption, labor shortages, and many other problems result. The data show that the proportion of children aged 0-14 is positively correlated with household consumption, whereas the opposite is true for the labor force aged 15-64.
Household consumption typically accounts for 60% of a country’s GDP. For the 2011-20 period, it was 68% in the United States, 59% in India, and 61% in middle-income countries excluding China, where it was only 37%. While China accounted for 16.7% of global GDP between 2017 and 2021, its share of global household consumption was a mere 11.5%. The reason is that its population aged 15-64 accounted for 75% of its total population – compared to 64-66% internationally – and that, in turn, followed from its one-child policy, which decreased the proportion of children aged 0-14 from 33% in 1982 to 13% in 2023.
China’s shrinking family size has reduced households’ basic needs, in the aggregate, leading to more arbitrary governance and higher income inequality. When the central government introduced its tax-sharing reform in the 1990s, that further suppressed local-government finances and weakened households’ balance sheets. Chinese household disposable income fell from 62% of GDP in 1983 to 40–44% in 2005-2022, compared to 60–70% internationally.
As Chinese society became more unequal and fragmented, it became incapable of restraining the regime’s excesses, let alone pushing for a political transition.
THE END OF THE ILLUSION
After four decades of rapid economic growth, China is now on the verge of escaping the middle-income trap. Its per capita gross national income stood at $12,850 last year and is expected to cross the World Bank’s high-income threshold of $13,845 this year. Recognizing that its economy is “second only to that of the United States,” the US House of Representatives recently passed legislation seeking to strip China of its preferential status as a “developing country” within international organizations.
But outside observers generally fail to see that because China’s household income-to-GDP ratio is so low, its middle class remains a minority. The country’s wealth lies disproportionately in the hands of governments, which can generally do whatever they want, and of the rich, who have made China the world’s largest luxury market. Now that societal aging is slowing the economy, it is becoming more likely that China will never develop a middle class strong enough to achieve structural political reform.
Moreover, young people aged 15-29 are usually the vanguard of democratizing reforms; but China’s one-child policy reduced the size of this cohort substantially. In Taiwan and South Korea, the share of the youth population peaked at 31% in the early 1980s, creating a groundswell of enthusiasm for democratization. When they became democracies in 1987, the median age in both economies was just 26. Similarly, when the proportion of youth in China peaked at 31% (with a median age of 25), there was a massive pro-democracy movement that culminated in the 1989 Tiananmen Square protest. But this upsurge was ruthlessly crushed by the government.
Last November, when China experienced widespread protests against the government’s zero-COVID policy, many international observers wondered if they were witnessing a new1989-style pro-democracy movement. But the grassroots mobilization lasted for only half a month. Once the government capitulated and rescinded the zero-COVID policy, there was little left to sustain political protests. This is what one would expect in a country with a median age of 42 and where the proportion of youth has fallen to 17%.
Many blame China’s political backsliding on individual leaders, not least Xi Jinping, who is on track to serve as president for life. In fact, China’s window for a democratic transition was short-lived, and it probably closed around the time of the Beijing Summer Olympics in 2008. By 2012, the youth share of the population had shrunk to 23%, the median age had risen to 37, and household disposable income had fallen to just 42% of GDP, indicating that the demographic and economic foundation of domestic authoritarianism and geopolitical revisionism had already been laid.
Still, Western and Chinese leaders long shared a belief in the prospect of China’s democratization, with one major difference: while Western leaders sought to promote it, Chinese leaders anxiously resisted it. Now, the game is up. The West is increasingly abandoning its unrealistic illusions, and many Chinese people – having accepted three years of harsh COVID controls – are counting on a powerful central government to provide social security, health care, and safety in the future.
The region with the oldest population, northeast China, lacks economic vitality but strongly supports the regime nonetheless. Its economic and political conditions today are a preview of the rest of the country tomorrow. Although aging will produce plenty of minor forms of social unrest, there will be no major upheavals. Even if China experiences the kind of turmoil that swept Russia in the 1990s, its huge elderly population would inevitably look to a Vladimir Putin-style strongman to stabilize the social order through tough top-down measures.
For the Chinese authorities, the greatest source of fear is not any homegrown threat to regime security but the rigidity and loss of vitality across society. The paucity of young people and increased reliance on strict censorship and repression will make China less dynamic, even without considering the effects of the new rivalry with the West.
OUT OF BALANCE
The unbalanced Sino-American economic relationship has been a major source of tension, especially over the past decade. This, too, has its roots in the one-child policy. Because Chinese parents have long worried that their only child will be unable to support them later in life, they have tended to consume less and save more for their own retirement. At the same time, Chinese governments, corporations, and the rich have also maintained high savings rates. As a result, China’s average savings rate over the 2005-2020 period was 47%, compared with 24% in the rest of the world, and 18% in the US.
Unlike other countries whose economies are driven primarily by consumption, China’s has run on exports and investment in real estate and infrastructure (such as high-speed rail). From 2005 to 2020, it had an average investment rate of 44%, compared with 23% in the rest of the world, and 21% in the US.
But over-investment has fueled a housing bubble and a local-government-debt crisis. The value of China’s housing market is four times the country’s GDP, compared with 1.6 times GDP in the US and 2.1 times GDP in Japan. Chinese housing outstrips even the entire US bond market. And despite the central government’s efforts to prevent the bubble from bursting, that outcome – which could trigger a global financial crisis – becomes more likely with a shrinking population.
Because China has always pursued a trade surplus, it developed a deepening symbiotic relationship with the US – what historian Niall Ferguson labeled “Chimerica” – earlier this century. While China exported massively to America, the US was still able to import only moderately more than it exported overall, owing to the dollar’s role as the world’s primary reserve currency.
But between 2001 and 2018, Chinese imports of goods from the US amounted to only 22% of what China exported to the US, compared to a ratio of 72% for US trade with the rest of the world. In 2018 alone, China exported $539 billion to the US, but imported only $120 billion, implying a trade surplus of $419 billion. Moreover, China long used these savings to buy up US government bonds and government-backed mortgage debt, thus playing a role in fueling the US housing bubble and precipitating the 2008 financial crisis. As Ferguson noted at the time, “Usually it’s the rich country lending to the poor. This time, it’s the poor country lending to the rich.”
Although this excessively unbalanced trade did benefit the US bond market and Americans, who benefited from low prices and low inflation, it also undermined the US real economy, especially the manufacturing sector. America’s share of world manufacturing exports had stabilized at 13% between 1971 and 2001, but then fell to 7% by 2018, owing to China’s accession to the WTO. We’ve now seen where this led: Rust Belt counties that were hollowed out after 2001 propelled Donald Trump to the presidency in 2016. Arguably, the US is the second-biggest victim of China’s one-child policy.
WHAT NEXT?
For the past two decades, I have been warning that China’s development model is unsustainable, owing to its distortive effects on world trade and many countries’ domestic economies. In a 2009 paper, I predicted that the US would seek to revive its manufacturing base, and I urged Chinese authorities to abandon the one-child policy and change course before America erected new trade barriers and placed restrictions on high-tech exports.
China did end the policy in 2016; but Trump was elected the same year, and a US-China trade war fully erupted in 2018. As a result, the share of Chinese goods in total US imports fell from 21% in 2018 to 13% in the first four months of this year. But America still has a growing trade deficit, because it has increased imports from Association of Southeast Asian Nations (ASEAN) countries without exporting more to them. Notably, these changes have coincided with a rise in Chinese youth (aged 16-24) unemployment, from 11% in 2018 to 21% in May of this year.
But US efforts to restore manufacturing have yet to bear fruit: America’s share of world manufacturing exports continued to decline, to 6% in 2022. The US has faced difficulties partly because the decoupling from China’s industrial chain has increased costs and created supply shortages, but also because it lacks sufficient vocational education and has failed to stem the erosion of manufacturing wage premiums.
Worse, the trade war remains unnecessary. An average of 23.4 million births per year from 1962 to 1990 made China “the world’s factory” and gave it a decisive advantage over the US in manufacturing. But as of last year, even China’s exaggerated official figures put births at just 9.56 million – and that number is expected to fall to six million in a few years, owing to the sharp decline in women of childbearing age and the continued decline in fertility. Thus, even without a trade war, China’s manufacturing sector – and the share of Chinese goods in US imports – is poised to shrink rapidly, just as Japan’s did in the 1990s.
Moreover, the Chinese market will be critical for US companies over the next decade, because China’s share of the world economy will rise despite its growth slowdown, while America and its allies’ combined share will fall. Though India is growing at a healthy clip, its per capita GDP remains too low for it to emerge as a major importer from the US in the short term.
Under pressure from the trade war, China has adopted a “dual circulation” and “common prosperity” strategy to reduce its dependence on overseas markets in favor of domestic consumption. But it faces a dilemma. Increasing domestic consumption is not possible unless household disposable income as a share of GDP rises toward the global average; but if that happens, the CPC may finally have to contend with a powerful middle class – just as Western strategists once hoped.
Ultimately, these kinds of reforms could benignly reshape China’s economy, society, and politics, as well as restoring some balance to US-China trade. But they would encounter even greater resistance than the economic reforms of 1978. If Xi is brave enough to follow through with such a paradigm shift, the West should welcome it.
Yi Fuxian: A senior scientist in obstetrics and gynecology at the University of Wisconsin-Madison, is the author of Big Country with an Empty Nest(China Development Press, 2013).