Why China’s declining population may doom its innovation dominance

Why China's declining population may doom its innovation dominance

China today is a tech giant, in large part because it is a giant. The country is home to the world’s largest population of capable young tech workers, all potential innovators. But China’s shrinking and aging population is on course to halve by the year 2100, while its median age is projected to climb by 18 years, from 39 to 57. Nearly every industrialized country is aging and shrinking, but China’s “demographic decay” is occurring faster.

Reporting from the front lines, one of China’s top tech entrepreneurs warns that China’s innovation dominance may be nearing its end. James Liang, a Stanford PhD in economics and founder, chairman, and former CEO of Trip.com, one of the world’s largest online travel services (400 million users), was an early canary in the demographic mine.

Liang has written four books—three data-driven polemics and one cautionary novel—arguing that preserving China’s innovative chops hinges on larger families, which have for decades been limited by official government policy. He’s appeared on China’s national talk shows and even performed a self-effacing comedy routine on a TV variety show to make his case. 

Over the last 40 years, as Chinese companies moved up the value chain, prosperity paid for evermore Chinese infrastructure, education, and R&D, at a scale smaller countries could never match. Today, the country mints about 4.7 million university STEM grads a year, ten times those in the U.S. Add to that the roughly 500,000 Chinese students who each year— before COVID-19—finished studies abroad.

That’s lots of brains getting ever brainier, and a formula that fueled China’s innovation ecosystem.

Chinese innovation is even indispensable to American tech leaders. In his March visit to China, Apple CEO Tim Cook extolled the company’s “symbiotic relationship” with China’s tech infrastructure. Chinese high-tech components are now about a quarter of those in an iPhone. At home, Cook bluntly tells U.S. leaders that Apple cannot match the quality of its 5 million person strong supply chain anywhere else.  (Apple’s commitment to China is growing less reciprocal. In early September, the Chinese government banned iPhones from government work.)

China, of course, has a slew of own homegrown tech titans, too. TenCent, TikTok parent Didi, Huawei, and around 300 other unicorns have grown out of what the Global Economic Forum calls “one of the global hubs of future-looking innovation.” China today is a tech leader, or near-leader, in several key emerging technologies, including high-speed trains, power transmission, renewable energy, next-gen broadband, satellites, rocketry, and moon landings. China’s official economic roadmaps aim at leading the world in biotech for drugs and agriculture, and in artificial intelligence. An Australian strategy think tank found that China also leads the rest of the world in 19 out of 23 key military technologies, including “a commanding lead in hypersonics, electronic warfare, and in key undersea capabilities.”

For those who compete against China’s innovation machine, its creative oomph is scary. Washington worries. In early August, the Biden administration banned American companies from investing in Chinese high technology. Fear over China’s capacity for tech innovation stokes trade wars and now calls into question 40 years of American economic engagement with the country.

Over the last decade, James Liang and I have been trading views on aging societies, matching the points in our books on the subject. Last month, Liang sent me his latest volume, Population Strategy: How Population Affects Economy and Innovation, which so far has been published only in China. (He sent me a translation.) 

The book’s central argument is brave—and a doozy. His warnings are more dire than ever. “[M]y research shows that the more critical impact of population on the economy is its impact on innovation” he writes. “[ . . . ] The shrinking and aging population is the biggest hidden danger to China’s future economic development.” Without some big changes, he fears, China is on a path to be overwhelmed politically and economically just beyond midcentury. In comparison, he says, a more vital U.S. and India will thrive and prevail.

Among high-income countries in the modern global economy, Liang argues, innovative industries are increasingly large, essential contributors to GDP. One factor above all, he argues, gives an economy the power to dominate today’s “innovation competition” and, in turn, gain wealth and power. It is the quality, quantity, and speed at which ideas flow and are commercialized from every corner. Countries with bigger populations have more participants to feed the kind of robust cross fertilization of ideas. 

Liang compares human society to the brain: The more healthy neurons (people) that fire and make connections (communications), the more developed the brain (society) will be.

Is China’s innovation brain destined for atrophy? If the innovation-and-population-size equation holds, yes. Nevertheless, I have some doubts.

In June, a podcast run by Chinese state media ran a conversation with me. It seemed that all of China’s current economic woes—high unemployment among young adults, the bursting real estate bubble, its untenable debt—were getting linked to the aging population. My host gravely asked if the country’s concerns were warranted. What matters for the economy, I said, isn’t just size, but how a country nurtures its creative genius. Many of the world’s smallest countries earn high marks for their innovative energy. Tiny Switzerland tops the annual Global Innovation Index. China comes in at number 11.

Most of the top ten countries are comparatively tiny, old, and have low fertility rates. An outlier is the U.S. in second place, where older workers are a productive, creative force. The average age of Americans who start tech companies is 39; the average age of founders of new businesses in general is over 55. In China, workers usually retire by age 60, often earlier. Yet, the country’s over-60 cohort may be the healthiest in the world. In China’s more affluent urban regions, life expectancy is over 83, matching long-living Italians and Spaniards. They can work and be creative longer.

When the podcast posted, Liang wrote me. He was complimentary, but didn’t wholly agree. He sees huge networks of young people as the essential condition to keep China at the top of the world innovation race. He proposes other interventions aimed at changing China’s population trend, not just its workplace.

The most important step is to pump up financial assistance to young families and social and monetary safety nets for older people. China’s young adults—usually singleton children—often bear the financial and time burden of taking care of their parents and grandparents. Combined with raising children, these responsibilities are expensive, and daunting. The Chinese government spends a small portion of the country’s wealth, less than 2% of GDP, on social services to help families. Liang urges that go as high as 5%.

Priming the country for more babies, he believes, requires social innovation, too. Chinese families have a famous preference for boy babies. Boys carry on a family’s name. Liang proposes that the country allow mothers to pass on their family surnames onto their daughters, which would create an added incentive for mothers to raise girls and parents to choose to have larger families (and resist illegal sex-selecting abortions).

No proposals are likely to have much effect before the Chinese people are confident that the current deep economic downdraft has passed. That could take a few years—or a generation. In the meantime, Chinese innovators will no doubt continue to contribute to the world’s basket of shiny new things, whether or not China dominates markets or the world. Perhaps it’s worth noting, however, that gloom over China’s aging overlooks China’s biggest win. 

In 1950, the Chinese people had an average life expectancy around 38, less than half of what it is today. They now have the immeasurable treasure of far longer, healthier lives, something even emperors of yore valued above riches.

A former trader and member of the Chicago Mercantile Exchange, Ted C. Fishman is the author of China, Inc. and Shock of Gray. His writing has appeared in The New York Times Magazine, Harper’s, Esquire, and many other publications. His forthcoming book on concrete will be published by W.W. Norton.

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Ted C. Fishman is the author of China, Inc., and Shock of Gray