In our view, these weak demographic trends are entrenched and are unlikely to be reversed by the government’s measures to encourage couples to have more children. So, the decline in the labour force will gather more speed, which means that the only way China can achieve its ambitious growth target is to rev up productivity growth. Unfortunately, raising productivity performance will be challenging as explained below. As we add up the likely contributions of each driver of economic growth — labour force growth, physical capital accumulation, and productivity growth — we believe that China’s long-term growth rate over the coming decades will not be more than 3%–4%, a far cry from the 8%-10% pace of the past two decades.
The latest numbers on China’s population dynamics make for grim reading. At the end of last year, there were 850,000 fewer Chinese than a year earlier. This is the first decline in China’s population since 1961 when a dire famine killed millions. Demographers now project that China’s 1.4118 billion population will be overtaken by India very soon.
The population data carry immense social and economic implications for China as well as for the rest of the world. At home, a faster contraction in China’s labour force is now likely which will undermine economic dynamism. That will put at risk the 4.7% pace needed to achieve President Xi Jinping’s ambition of China becoming a “medium-developed country” by 2035. A more slowly expanding China will contribute less to global economic growth as well. That, in turn, would affect a whole range of factors from commodity prices to currency dynamics to how the geo-political balance will be reshaped.
