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China: Demographic shift poses tough economic and fiscal challenges
China is undergoing a demographic transition that implies downward pressure on labour supply and economic growth over the coming decades.
Based on the latest data from the National Bureau of Statistics, mainland China’s population fell 850,000 to 1.41bn in 2022 – the first decline in 60 years. The number of births fell to a new low of 9.6mn in 2022, down from 10.6mn in 2021, and was outpaced by the 10.4mn deaths recorded in 2022, up from 10.1mn in 2021, partly related to Covid infections.
Worsening demographics will be a drag on potential growth
We expect China’s falling birth rate will continue to weigh on growth in the working age population (15-64 years old). The 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. What’s more, the labour participation rate has also been falling since 2015, exacerbated in recent years by the pandemic and the zero-Covid policy.
Even though we anticipate a modest recovery in the labour participation rate as the country reopens and activity normalises, this won’t fully offset the effects of the demographic shift on growth of the working-age population over the medium to longer term. We forecast China’s working population will contract 0.2% per year this decade, down from +0.1% per year in 2010-2019 (Chart 2).
China’s working age population will shrink over the decade
Consequently, the decline in labour supply growth will deepen in the coming decades. We forecast the contribution of labour supply to GDP growth will be a net drag of -0.1ppts this decade and -0.3ppts the next, as opposed to the +0.2% contribution seen in the decade through 2020 (Chart 1).
And while we envisage that the pace of decline in China’s working age population will likely not be as rapid as our projections for Japan (-0.7%), the dependency ratio has nonetheless been rising similar to Japan’s, which will increase the economic and tax burden on the shrinking labour force (Chart 3).
A rising dependency ratio will burden a shrinking labour force
As China faces these strengthening demographic headwinds, this will leave GDP growth reliant on continued heavy levels of investment and a relatively rapid pace of productivity growth. However, the decline in returns on investment (particularly in traditional infrastructure, real estate, and heavy industries with overcapacity) and the retreat of investment growth from very high levels will reduce the contribution of capital accumulation.
Moreover, given the backdrop of technological decoupling from China by advanced economies and an ongoing diversification of supply chains away from China, we expect only 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.
Source : Oxford Economics
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