INSIGHTS: What China’s Census Tells Us About the Future of Technology

Two weeks ago, China released the results of its once-a-decade population census. The results were broadly in line with forecasts: the country is experiencing its slowest population growth in decades, while the share of elderly people continues to rise. According to some estimates, China’s population will begin to decline in 2027. What do these figures mean for Chinese technology?
The Bottom LineThe demographic dividends that technology companies have relied on to fuel growth over the past several decades appear to be coming to an end.

China’s population is getting older, creating challenges both for internet startups in Beijing and smartphone factories in Shenzhen.

At the same time, there are also opportunities, as the country seeks to improve labor productivity and upgrade its labor-intensive manufacturing sector by transforming factories into “smart factories.”

Even as the overall population levels off, China’s urban and educated populations continue to grow rapidly.

Key Figures

• China’s population reached 1.41 billion in 2020, up 0.7% year-on-year and 5.4% compared with 2010, when the previous census was conducted.
• Average annual population growth over the past ten years was 0.54%, down from an average of 0.57% between 2000 and 2010.
• The share of Chinese citizens aged over 60 reached 18.7% in 2020, up sharply from 13.3% in 2010.
• The share of the population aged 15–59 fell to 63.35% in 2020, from 70.1% a decade earlier.
• The share of Chinese citizens with higher education or above reached 15.5% in 2020, compared with 8.9% in 2010.
• Around 902 million Chinese citizens, or 63.9% of the population, now live in urban areas. In 2010, the figure was around 666 million, or 49.7% of the total population.

Challenges Internet PopulationFor many years, the growth of technology companies depended on an ever-expanding number of internet users.

• However, internet penetration in China is approaching saturation. By the end of 2020, China had 989 million internet users. According to the government’s Statistical Report on Internet Development in China, this already represented more than 70% of the population.
• As population growth slows and internet penetration reaches a plateau, it will become increasingly difficult for internet companies to continue growing.

Population Aging“Population aging has become a fundamental national condition that China will face for some time to come,” Ning Jizhe, head of China’s National Bureau of Statistics, said during the presentation of the census results.

• Higher WagesFor decades, China’s manufacturing industry relied on a vast supply of young workers willing to work for low wages. China is now the world’s largest exporter of consumer electronics such as smartphones and personal computers.
• Labor shortages and rising labor costs are now encouraging contract manufacturers to move some production lines from China to neighboring countries such as Vietnam and India.
• China’s gig economy, including its rapidly expanding ride-hailing and food delivery markets, also relies on widely available low-cost labor. This situation is unlikely to persist amid declining birth rates and an aging population.

Less Innovation

A smaller young population could mean less innovation, argues Liang Jianzhang, a professor at Peking University and a demographic expert.

• Liang is also the founder of Ctrip, China’s largest online travel agency. In 2006, he stepped down from his management role at Ctrip to focus on demographic issues. He argues that China should spend between 1% and 5% of GDP on measures to encourage higher birth rates.
• Following the publication of the census results, Liang told Chinese media that population aging would leave more older workers in the labor market, preventing younger people from entering and thereby constraining innovation.
• Liang also believes that declining demand will hurt innovation. He cited the hotel market as an example: if demand for hotels declines, fewer new hotels will be built and new hotel technologies will have fewer opportunities to be tested.
• A 2019 paper by Li Zipu, a professor at Zhongnan University of Economics and Law, stated that population aging had negatively affected scientific and technological innovation in several provinces where the proportion of elderly people exceeded 13.3%. Li argued that population aging and postponing the retirement age would make it more difficult for companies to hire young workers, while the existing younger generation could lose opportunities for career advancement.
• Another study by Wang Wei and Jiang Zhenmao of the Shanghai University of Finance and Economics argued that population aging has a positive effect on technological innovation because older workers can apply their experience in new ways. Their research was based on the number of patents filed by different age groups.

Opportunities The Productivity MarketAs China’s so-called demographic dividend weakens and labor costs rise, demand for productivity-enhancing tools is increasing sharply.

Enterprise software has become one of the hottest segments for venture capital investment in China.

• China’s software-as-a-service (SaaS) market remains relatively small but is demonstrating impressive growth. In 2019, the market reached RMB 19.4 billion ($3 billion), up 34.2% year-on-year.
• Automation appears more economically attractive to businesses than ever. According to estimates by research company IDC, China’s robotic process automation market — referred to as EPR in the source text — was expected to grow by 64% annually between 2018 and 2023. IDC reported that the market reached $1 billion in 2020.
• “Once the Lewis turning point has been passed, we enter a stage of neoclassical development. Labor supply shifts from surplus to shortage, and economic development no longer depends on crude labor inputs but on improvements in production efficiency,” wrote Shao Yu, Chief Economist at Orient Securities. According to Standard Chartered, China reached the Lewis turning point in 2013.
• China’s latest five-year economic plan includes commitments to improve vocational education and increase investment in automation and digital infrastructure.

HealthcarePopulation aging also creates investment opportunities in areas such as healthcare and elderly care.

As spending in this segment increases, both startups and major technology companies are moving rapidly to digitalize these industries.

• With few major incumbent companies, the elderly-care sector may be ripe for innovation, wrote Luo Zhineng, an analyst at Yuekai Securities. China’s elderly-care industry has yet to develop a mature business model, remains relatively small and has an immature profit model. Its level of development therefore lags significantly behind the scale of China’s aging population. As the “one-child generation” becomes the backbone of society, family-based elderly care is expected gradually to give way to institutional elderly care.
• An investment note by China Securities analysts Huang Wentao and Wang Zexuan stated that population aging would lead to a sharp increase in demand for medical services. Rural populations in particular could benefit from services delivered through remote communications technologies.
• The COVID-19 pandemic had already stimulated investment in medical technologies. Healthcare applications actively developing in the market during the previous year included JD Health, Medlive and Tencent’s WeDoctor.

Industrial Technology UpgradingTo offset the effects of an aging workforce, China has long promoted the transformation and modernization of its manufacturing sector.

• Among the strategies adopted is “Smart Manufacturing,” which aims to digitalize factories.
• “More importantly, China [must] continue to support growth through technological development, move toward high technology, move toward higher value added, and transform the entire supply chain in order to sustain economic growth,” Raymond Yeung, Chief Economist at ANZ, said in an interview with CNBC in mid-May.
• Yeung said that upgrading China’s manufacturing sector represents a “more realistic” approach than attempting to restore population growth.

Urbanization and Lower-Tier CitiesAnother positive point in China’s census data is the extent to which the country’s urban population expanded over the past decade: between 2010 and 2020, it increased by more than 35%.

According to a report by Evergrande Research, much of China’s urban population growth during the preceding five years occurred in smaller cities.

• This means that the pool of users available to companies seeking expansion beyond already “developed markets” — into China’s lower-tier cities and smaller urban centers — remains enormous and continues to grow rapidly.
• China’s current urbanization rate stands at 63.9%. The target set in the latest five-year plan, which ends in 2025, is to increase this figure to 65%, implying an increase of around 15.5 million urban residents.
• Companies that have achieved significant success in this market include e-commerce innovator Pinduoduo, video-sharing app Kuaishou, and news aggregator Qutoutiao.

Challenges, opportunities, technologies, China — we take a closer look.

Wei Sheng, additional contributions by Julia Lu, TechNode