The term "demographic dividend" means that the share of 'dependents' too young or too old to work is relatively low. This has several effects, namely a large amount of producers contributing to economic growth; a large amount of consumers contributing to economic growth; a large amount of savers contributing to economic growth via investment; and finally, a huge potential of 'human capital'. If women are participating in the production process, the effects will even be stronger, and GDP per capita higher.
China reaped an immense demographic dividend during the 1980s and 1990s that contributed to the high-growth period of the economy, but today, the dividend has been exhausted and China faces the challenge of an aging society.
The decrease of the democratic dividend is at least partially the result of the One-Child Policy (Yi hai zhengce 一孩政策) initiated in 1980 and in effect until 2015. The fertility decline of the policy led to a demographic dividend with a remarkably low dependency rate with many young working persons having but one child (Naughton 2018: 185). On the other hand, the One-Child policy produced an unbalanced sex ratio and an increasing share of elderly people which will, in the future, increase the dependency rate.
The population growth in China was about 0.4 per cent before the modern age, with a fertility rate of about 6, but high death rate and child mortality (Naughton 2018: 187). In the modern age, particularly after the founding of the People's Republic which cared for rapid improvements in sanitation ('barefoot doctors'), water supplies, pest-control, and vaccination programmes, the growth rate increased drastically, leading to what could be perceived as a "population explosion", with an unusual population growth of about 3 per cent during the late Mao era (Naughton 2018: 191).
Even if the rapid decline in population growth is often attributed to the One-Child Policy, it began as early as 1970. The total fertility rate (TFR, average number of children a woman gives birth to over her lifetime) in China dropped quickly and in the same pace as in much higher developed countries in East Asia (Naughton 2018: 192). This might have been due to some particular characteristics of urban society in China, with relatively high female labour participation, high female education attainment, high educational aspirations, good access to health, and contraceptive services, and a good social security system. Another reason for the decrease in the TFR might have been the family planning initiative of 1971 called wan-xi-shao 晚息少, "marry late, repose between pregnancies, and fewer children". It was an enhancement of the marriage law of 1951 which foresaw later marriages. In 1980, the One-Child Policy was adopted which foresaw a population target of 1.2 billion in 2000 (from 978 million in 1980) (Populationpyramid.net).
The One-Child Policy was accompanied by harsh penalties and sanctions for parents having more than one child, and local officials exerted in the beginning substantial pressure on couples, often forcing women to abort 'superfluous' children. The policy was not applied to the National Minorities, and its enforcement in various regions of China oscillated between laxity and severity. It was enforced more strictly in urban areas, while family in villages had often the opportunity of under-reporting and having second children brought up by relatives somewhere else.
In spite of all pressure, the policy was never practiced with all rigour. In 2000, the original population target was surpassed by 266 million (Naughton 2018: 195). In the end, the rapid urbanization and modernization of China led to a fertility decline anyway, so the plausibility of the whole policy must be questioned. From 2016 on, all families were allowed to have two children, yet this does not mean that all urban families will effectively produce two children. The reason for this assumption are changing preferences as common in modern urban societies.
One reason for the change in the policy of birth planning (jihua shengyu 计划生育) was the increasing rate of dependents (elderly people) and the shrinking of the demographic dividend. Another reason is the unbalanced sex ratio. While there is a natural ration of about 105 females to 100 males (Ritchie & Roser 2020), female infanticide was common in traditional China (Jimmerson 1990; Lee 1981; Mungello 2008), and the strictness of the One-Child Policy resulted in a choice of aborting ('missing girls') or not reporting ('hidden girls') female babies. In China, this is a particular problem because marriage is still a universal paradigm which every male has to follow. Men with lower incomes or younger males will thus not be able to find wives. Moreover, competition on the marriage market is a factor for increased saving rates, as only sufficient savings will enable bachelors to offer their potential spouses monetary assets.
In modern societies, the "target family size", in other words, the preferred number of children, is influenced by a juxtaposition of costs and benefits, in economic wording, the identification of opportunity costs caused by children. Another factor, stimulated by the parents' education, is the changing view of children not as supporters to the family income, but as beings who had to be fostered and be given education. Education itself, especially higher education, proves more costly than primary schooling, and thus needs financial buffers.
There are certain gaps in the population pyramid of China as consequences of the Great Leap Forward, when the fertility rate dropped sharply (and the mortality rate peaked) for a few years (1958-1963), and of the early years of the Cultural Revolution (1966-1968)—yet on a much lower level of impact. A drastic decline in fertility occurred in 1990, yet the size of annual cohorts have remained constant since then. As a result, the elderly population grows in China and will make out about 20 per cent of the whole population in 2030 (Naughton 2018: 203). The number of dependents will be quite high also as a result of a particularly low age of retirement in China with only 60 (Arora & Dunaway 2007; OECD 2019). This is a matter under discussion, just as it is in some Western countries.
In contrast to urban society, elderly persons in rural regions are usually not covered by pension plans, have a lower income, and are without their children, who left to work in the cities. To make things even worse, China’s pension liabilities are unfunded, and instead paid directly from the payments of current workers.
The increasing dependency ratio means a declining GDP per capita in the long run. China might risk a future of becoming old before becoming rich.