China begins legislative reforms after shift in demographics

Yun Zhang Wednesday 17 May 2023

In early May at a high-level meeting, the Chinese central government placed population and education among its top priorities for the coming years. The meeting’s timing was uncanny – shortly before, the UN had announced that India had officially overtaken China as the world’s most populous country. India’s population is over 1.425 billion, surpassing China for the first time since 1950 when records began. Meanwhile, China’s total population dropped by 850,000 persons in 2022 to 1.42 billion, marking the first such decline in over 60 years. In the same year, China’s national birth rate fell to a record low of 6.77 births for every 1,000 people – among the lowest globally.

This shift in demographics has attracted headlines. But within China, business conversations have yet to focus on the implications. Vincent Qian, Working Group Liaison Officer (China) on the IBA Asia Pacific Regional Forum and a senior partner at Dentons China, says the demographic shift will take place over a long period of time and its effects will take years to manifest. Qian doesn’t believe the shrinking population will have a major impact on China’s economy in the near future, ‘but in the long run, it will definitely have negative effects’.

For example, China’s working age population is at risk of an estimated nine per cent drop over the next ten years, hindering economic growth and creating serious social issues, with less funds available for public services such as pensions and healthcare. It’s also expected to dampen international trade and foreign investment into the country.

However, Qian explains that, right now, the more urgent issues among the legal and business communities are post-Covid economic recovery and job creation. ‘So many migrant workers went to their countryside homes during Covid-19 as factories and businesses were shut down’, explains Qian. ‘What I’m concerned about is how the government and businesses can create jobs for those unemployed workers.’

China’s aging and decreasing population will mean businesses and law firms alike will no longer be able to simply take for granted a ready supply of local talent for their business operations

Caroline Berube
Co-Chair, China Working Group of the IBA Asia Pacific Regional Forum

China’s Central Financial and Economic Affairs Commission has acknowledged the country’s demographic challenges. The government will introduce specific measures this year to incentivise childbirth, such as cutting the associated costs of pregnancy, as well as substantial reductions in childcare and pre-school education fees. The government has also vowed to promote female employment and tackle workplace discrimination against women for having children.

In 2021, amendments were made to China’s Population and Family Planning Act to allow couples to have three children and to increase the amount of maternity and paternity leave for new parents. However, more drastic changes are needed to remove barriers preventing the younger generation from having more children. The major concerns for young people in China are high housing prices, stagnating wages, long working hours, high medical care costs and job discrimination against women.

Inevitably, businesses will face more competition in the recruitment market as the talent pool becomes smaller. Businesses have a commercial incentive to enhance employee welfare and provide equal opportunities and better support for female employees, so that they can attract and retain talent. However, all the trends point towards the costs of operating businesses in China becoming higher. ‘Employers have a responsibility alongside the Chinese government to play their part in supporting employees in the best ways they can’, says Caroline Berube, Co-Chair of the China Working Group of the IBA Asia Pacific Regional Forum and Managing Partner of HJM Asia Law & Co in Guangzhou, China. ‘China’s aging and decreasing population will mean businesses and law firms alike will no longer be able to simply take for granted a ready supply of local talent for their business operations.’

The government must also invest in and improve its aged care system. It’s estimated that those aged over 65 now make up nearly a fifth of China’s population. The UN predicts this percentage will rise to nearly 40 per cent by 2050. The business and legal communities in China have spotted new opportunities. ‘Whilst China’s shrinking and aging population are a concern for businesses and law firms alike, it also creates a market [in assisting and helping] the aging population in the healthcare and mobility sectors, for example’, says Berube.

‘China will still be the world’s first or second most populous country for a long time’, says Gavin Sun, an executive partner at DeHeng Law Offices in Beijing. ‘The size of China’s middle class will continue to expand, so the demand for better services and higher standard of living will increase. There’s still huge potential for businesses, particularly in the services industry, such as healthcare, education, entertainment and sports.’

For the manufacturing sector, which is already struggling to recruit workers, a shrinking population will threaten its future growth. However, under the government’s current five-year plan, the manufacturing sector is undergoing a transition – from a low-cost, low-margin and labour-intensive model to one of higher end, higher margin and higher value-add. Here, foreign investment is encouraged to upgrade China’s industrial and supply chains.

Immigration is another tool governments can utilise to tackle demographic challenges. Nicolas Rollason, Chair of the IBA Immigration and Nationality Law Committee and Head of Immigration at UK law firm Kingsley Napley, explains that China opened up its immigration policy in 2017, albeit relatively quietly, but the take up rate has not been high. ‘Similar to Japan, language is a natural barrier to attracting highly skilled migrants to China’, he says. ‘There may be incentives for more low-skilled immigration, but there needs to be much more on offer to attract high-earning talent who want to start a family and bring up their children in China and stay for the long-term instead of expat employees who will leave after a period of time.’

Rollason adds that the problem won’t be solved by changing the immigration policy alone. ‘It is more to do with how you can attract foreign businesses in China, the commercial incentives, and the geopolitical dynamics’, he says. ‘You need to create an environment in which companies are happy to grow business there and feel their businesses, people and intellectual properties are protected.’

Maintaining a competitive wage is another factor relating to the success of a country’s immigration policy, as Yohsuke Higashi, a partner at Japanese firm Mori Hamada & Matsumoto, highlights. ‘The Japanese government has tried to attract high-level talent from abroad, but it has not been so successful’, he says. ‘One of the reasons is that the pay level in Japan may not be as competitive as US companies or other foreign companies. Although the average monthly salary level has been increasing, as the exchange rate of yen weakens, the pay level is getting lower compared to other countries.’

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