China's worsening population data presents an opportunity for India

India must do whatever is necessary to prepare its economy to benefit from a slowing China. But a proper strategy is needed as India's own demographic dividend will not last forever

Most of us know that China faces a population problem. Rooted in the one-child policy and changing social and cultural norms, the country has huge demographic challenges ahead. However, what was not clear (to me at least) is just how serious those challenges are, their visible impact within a decade, and how the data is only getting worse with every revision.

To start with some hard facts: Population growth in China has already turned negative. In both 2022 and 2023, its population actually shrank. As recently as 2019, the consensus was that China would reach a peak population of 1.45 billion in 2031. However, the population peaked in 2021, a full decade earlier, at around 1.4 billion. Though some commentators have cast doubts even on this 1.4 billion number, arguing the actual population is probably 100 million lower than the official statistics.

The fertility rate in China, at 1, is now lower than that of the US (1.6) and even Japan (1.2). Would you have ever thought that China would have a lower fertility rate than Japan? Despite the one-child policy being formally dropped in 2016, China’s fertility rate has continued to decline. In fact, post-2016, the birth rate has taken another sharp downturn. This seems to indicate a more deep rooted issue than just the one-child policy. Fewer women in China seem willing to marry and have children, instead choosing to focus on their careers. Apart from the changing social norms towards marriage, China currently has 30 million more men than women, a consequence of the one-child policy and prevalent gender bias—a fundamental problem with no solution.

Today, China has a working-age population of about 1 billion people. This will decline by about 100 million every decade from now onwards (source: Apollo Capital). For context, 100 million is twice the working-age population of Germany. That implies that China will lose the equivalent of 20 per cent of the German workforce every year for the coming decades. Over the next 20 years, while China will shed 200 million workers, India will add about 175 million, such is the divergence in demographics.

In China, over the coming decade, the ratio of those aged 60 and above to the population aged 15–59 (dependency ratio) will rise from 30 per cent to 50 per cent. This ratio was only 15 per cent in 2001, such is the pace of deterioration. By 2031/32, China will have a greater percentage of its population over the age of 60 than the US. By 2036, China will have a greater old age dependency ratio than the US. A rising dependency ratio signals falling productivity and rising fiscal challenges. These are amazing numbers and China’s demographic data is “falling off a cliff”, so to speak. In the base case fertility projections by the UN, the population of China declines by 46 per cent by 2100 to about 770 million! The median projection has the population declining to about 630 million by 2100!  It is also a fact that the data is only deteriorating. The same projections made in 2010, for example, had China’s working-age population more than 125 million higher by 2100 than today’s expectations.

The obvious counterbalance to bad demographics is immigration. This is how the US, the UK and other Western countries will slow their demographic decline. However, for China, given its political system, openness to foreigners, and size, immigration cannot be the answer. The data is bad and deteriorating, but what are the long term implications for markets, the global economy and India?

One clear takeaway is that China is not going back to high growth. How do you grow if the working-age population is declining? There is only so much that productivity can catch up, especially in a China where the government seems to have turned its back on large parts of the private sector and is increasingly interfering in larger chunks of the economy. If private entrepreneurs are fearful, is that an environment for accelerating productivity? Given their quality infrastructure, there is no low-hanging productivity release from just building more and better assets. In the absence of a surge in productivity, how will China grow faster than 2-3 per cent in real gross domestic product (GDP) terms? Has any country with a declining population been able to grow at even 3 per cent? The world has little experience with declining populations, especially for a country as large as China. There will likely be unintended consequences.

As China slows and ages, what are the fiscal consequences? We all know the economy is over leveraged, though the debt is largely from domestic capital. Can it sustain this leverage with slower growth, possible deflation, and having to fund the social costs of aging? As nominal GDP growth drops, the sustainability of the debt load comes into question. To avoid a debt trap, nominal GDP growth has to be higher than the cost of debt.

If growth slows to 2-3 per cent, the country will run large surplus capacity across sectors and be a force for global deflation. Unable to sell enough domestically, China will dump goods overseas and cut prices. Chinese dumping will kill pricing power across industries. Countries will have to decide whether to take advantage of these low-cost imports or shield their domestic industries through trade barriers. In many products, China will no longer be the main source of incremental demand. Multinational companies will be forced to take India even more seriously, as it becomes the new source of incremental demand.

It is also worth thinking about the consequences for global commodity prices. China accounts for over 50 per cent of global consumption for virtually every commodity. As it slows, no other country, including India, can fill the breach. One should expect real prices across the commodity complex to decline. This should be a boon for a large commodity importer like India. As we continue to build our infrastructure, falling real commodity prices will be a big help in keeping costs under control.

While we have all been excited by the China +1 opportunity for India due to geopolitical factors, the fact remains that with its working-age population declining by 100 million every decade, China will have to shed manufacturing jobs. Workers will simply not be available or just too costly. This remains an incredible opportunity for India.

This government has done a lot to make India more attractive for manufacturing, but we must aggressively push for low-skill manufacturing. We continue to lose out on mass assembly low-skilled jobs, such as those in garments, toys, footwear, and electronics — sectors where we must attract more jobs as they leave China. India is still not the default destination as these jobs shift.

If China is at peak strength today, with the demographic challenges visible, what does that imply for geopolitics? If it also sees the inevitable slowing and eventual decline, will that cause it to push today for whatever be its long-term territorial objectives?

It is clear that the days of heady growth for China are most likely over. India has now emerged as the new emerging market growth champion. However, we must not rest on our laurels or become complacent. The slowing of China presents a huge opportunity for India. We must embrace this with both hands and do whatever is necessary to prepare our economy to benefit from a slowing China.  This is a secular shift in economic prospects. We must think through the consequences and have a game plan to capitalise on this demographic transition. India is currently in its own demographic sweet spot, and we must take advantage of it. For as China shows, our demographic dividend will not last forever.

The writer is with Amansa Capital