How China can turn its demographic challenge into economic edge

China stands on the verge of a profound demographic shift. With an ageing population and mounting economic uncertainty, the government’s recent decision to raise the retirement age by up to five years is a bold move designed to avert what many fear could be an impending crisis. Yet while this policy addresses immediate concerns, it also points to a deeper issue – one that extends beyond shrinking workforces and pension deficits.

The true test for China lies in boosting labour productivity. Raising the retirement age is merely a stopgap for its strained pension system, which is projected to run dry by 2035. Several regions, particularly in China’s industrial northeast, rely heavily on subsidies from wealthier coastal provinces to maintain pension payouts.

While raising the retirement age is expected to reduce the pension shortfall by 20 per cent in the next decade, these transfers will become increasingly unsustainable as wealthier provinces face ageing populations of their own. As such, the real challenge is not just expanding the workforce but improving how efficiently labour is used.