New Delhi: World’s second-largest economy China is confronting the impact of a profound demographic shift on its labour force growth and economy as the latest official data showed the country’s population declined in 2022 for the first time in 60 years. According to some estimates, a shift in China's demography would drag China's economic growth to just 4.5% in the current decade as opposed to the growth of 7.7% recorded during the previous decade.
Any change in China’s demography and its economy deeply impacts its trading partners such as the USA, India and other European countries including African countries as China is the biggest trading partner of these countries and blocs in most cases.
The impact of China’s demographic shift may not be visible in the near term, as economists expect that the labour participation rate will recover as the country reopens and activity normalizes after the deadly COVID wave which has engulfed the country at present.
However, reopening of the country and normalization of economic activity post-COVID will not be enough to fully offset the effects of an ageing population on the size of the working-age population, and economists and experts expect the decline in labour supply growth will deepen in the coming decades.
China’s shrinking labour force
China’s huge working-age population was one of the main factors behind its unprecedented rapid economic growth over the last three decades. However, with the changing demographics, a shrinking labour force will widen the pension gap, weakening the social safety net.
The shrinking Chinese labour force impacts the country’s and world's economies in several ways. For example, it could keep savings rates high, hindering the government's rebalancing efforts towards a consumer-driven economy.
Moreover, the fiscal implications are also negative, as the fiscal space for a response to any future crisis will be constrained, particularly as local government debt levels in China are already at an increased level.
Economists believe that the worsening demographics will be a drag on growth, leaving the economy reliant on investment and productivity. But in the case of China, the returns on investment (RoI) are declining, while productivity is being challenged by the international threats of technological decoupling and supply-chain diversification.
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According to an assessment carried out by the Oxford Economists, China's GDP growth will slow to an annual average of around 4.5% this decade, from 7.7% per year in 2010-2019.
What is China’s demographic shift?
China is undergoing a demographic transition that implies downward pressure on labour supply and economic growth over the coming decades. According to the latest data maintained by the National Bureau of Statistics (NBS), mainland China's population fell 850,000 to 1.41 billion in 2022, the first decline in 60 years.
The data showed that the number of births fell to a new low of 9.6 million in 2022, down from 10.6 million in 2021. Significantly enough, in 2022, the number of deaths exceeded the number of births in the country. The data showed that China recorded just 9.6 million births while it recorded 10.4 million deaths, an increase which is also attributed to Covid infections.
In 2021, the situation was different as the number of births was still higher than the number of deaths registered in the country. In 2021, China recorded 10.6 million births and 10.1 million deaths.
Future direction of China’s demographic shift
According to an analysis by Lloyd Chan, senior economist at the Oxford Economics, China's falling birth rate will continue to weigh on growth in the working age population (15-64 years old). “China’s working age population had already peaked in 2015 and then declined by an average of 0.1% per year during pre-pandemic years to 2019,” Lloyd Chan said. He said the labour participation rate has also been falling since 2015 which has been further exacerbated in recent years by the pandemic and due to the zero-Covid policy.
“We forecast China's working population will contract 0.2% per year this decade, down from +0.1% per year in 2010-2019. Consequently, the decline in labour supply growth will deepen in the coming decades,” Chan said in a statement to ETV Bharat. Lloyd Chan’s forecast suggests that the contribution of labour supply to China’s GDP growth will be a net drag of -0.1 percentage points this decade and -0.3 percentage points in the next, as opposed to the +0.2% contribution seen in the decade through 2020.
China’s demography headed Japan’s way
According to a projection by the economists at the think tank, the pace of decline in China's working-age population will likely not be as rapid as is their projections for Japan (-0.7%) but the dependency ratio has nonetheless been rising similarly to that of Japan.
It will increase the economic and tax burden on the shrinking labour force as China faces these strengthening demographic headwinds, this will leave China’s GDP growth reliant on continued heavy levels of investment and a relatively rapid pace of productivity growth.
The way forward for China’s economy
The decline in returns on investment, particularly in traditional sectors such as infrastructure, real estate, and heavy industries that have propelled China’s rapid economic growth in the recent decades but now face the problem of overcapacity, the decline of investment growth from very high levels will reduce the contribution of capital accumulation.
More significantly, given the backdrop of technological decoupling from China by advanced economies and an ongoing diversification of supply chains away from China, economists expect only a modest total factor productivity growth in the future. “Consequently, China's economy looks set to enter a structural slowdown. We forecast GDP growth will slow to an annual average of around 4.5% this decade, down from 7.7% per year in 2010-2019,” Observed Lloyd Chan.
