Tuesday, July 23, 2024

China faces economic headwinds as it grapples with an aging — and shrinking — population

A little boy with his mother and grandmother, watch the sunset scenery at Beijing international airport. 

Zhang Peng | Lightrocket | Getty Images

China’s population is shrinking, and the demographic shift will ultimately hurt its economy, shrink the labor force and put pressure on fiscal policy.

“The working age population [in China] will fall so rapidly over the next decade, that the Chinese economy will need to deal with 1% drag in GDP growth per year for next 10 years,” Darren Tay, head of Asia country risk at BMI Country Risk & Industry Analysis, told “Squawk Box Asia” in June, referring to estimates gathered by evaluating world population data released by the United Nations.

“The fiscal strain as a result of ageing is immediate and concerning,” the Economist Intelligence Unit has warned.

“Economic growth hinges on productivity, capital accumulation and labour inputs. The negative effect of an adverse demographic landscape will manifest primarily through a shrinking workforce,” according to the report published in January.

Raising the retirement age is “one of the few viable options” to maintain long-term fiscal balance, the EIU said.

“Our calculations suggest that if the retirement age is raised to 65 by 2035, the pension budget shortfall could be reduced by 20% and received net pension can be increased by 30%, suggesting relief of both government and household burden,” according to the report.

Birth rates are falling around the world as women choose to have children later, or not at all.

Monetary policy alone cannot address China's 'growth headwinds' from its demographic crisis: Analyst

Fertility rates have halved across OECD countries — some of the world’s richest nations — falling from about 3.3 children per woman in 1960 to about 1.5 children per woman in 2022, according to the OECD, or Organisation for Economic Co-operation and Development.

“This is significantly below the ‘replacement level’ of 2.1 children per woman needed to keep population constant in the absence of migration,” according to the June report.

China’s shrinking population

Falling birth rates

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Shrinking workforce

China’s policy shifts

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Economists also agree that Chinese policymakers should also work to raise the retirement age in the country, create more aggressive tax rebates for costs associated with child-rearing, and step-up its efforts in constructing affordable housing in the country.

Despite the slowdown in growth expected in China due to its demographics issue, the country’s GDP has grown an average of 9% per year since 1978, according to the World Bank.

Ultimately, “the fact remains that growth of even around 3% would not be, by any stretch of the imagination, a disaster for the Chinese economy,” Tay from BMI told CNBC.

“If they would continue to grow at that pace, which probably would be more sustainable, the average Chinese citizen would be in real terms, better off in income by 13% by 2033,” he added. “So living standards would still continue to rise.”

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