Abstract: Statistics from multiple sources have shown that China’s population will peak in the coming years, posing a challenge to the country’s economic development through the negative impacts on demand and investment. In this paper, the author calls for more policy preparation and rolls out three policy suggestions.
According to the seventh national population census, the total population in 2020 is 1.412 billion. Data for 2019 was also updated. The net population increase in 2020 is as small as 2.04 million. As shown in the left half of Figure 1, with the change of the national policy on childbirth, the year of 2016 saw an explosive growth of newborns. Since then, the annual number of newborns has continued to decline, falling to 12 million in 2020. As shown in the figure on the right, the crude birth rate has gradually declined, while the crude death rate has remained stable for a long time. That is to say, data of the seventh national population census and the previous population trends have shown that the total population will reach a peak soon.
Figure 1: Changes in the number of newborns, crude birth rate and crude death rate in China
It is worth pointing out that the COVID-19 pandemic may have exerted a negative impact on the birth rate. While we lack more systematic and comprehensive information to assess the impact of COVID-19 on fertility behavior, other economies have generally seen a decline in fertility rates since its outbreak. If this is the case, then this negative impact will subside when the pandemic is brought under control. Therefore, it is normal if the total population is to either peak or fluctuate around the peak value in the coming years.
Population peaking has symbolic significance and news effect. However, the more important thing is to have a full estimate of the socio-economic impact it may bring, and actively roll out policy responses.
Before the Industrial Revolution, demographic changes had the characteristics of a typical Malthusian economy, and population fluctuations were frequently seen in many countries. With the rapid increase in productivity that followed the Industrial Revolution, the total population of most countries kept growing in peacetime. Especially after World War II, the total population of all countries has shown a momentum of rapid growth. This trend was known as population boom in the 1970s.
Developed countries were the first to enter the era of fertility rates declining, which gave rise to demographic transition and population aging. But negative population growth, driven by demographic transition, was rarely seen after World War II due to lengthened life expectancy. According to statistics of the World Population Prospects released by the United Nations, after World War II, among economies with a total population of more than 1 million, 46 of them experienced negative population growth, but most of the cases were due to factors of mechanical population changes such as war and migration. Moreover, many of them resumed normal population growth after a period of negative growth.
As of 2019, 19 countries had suffered continuous negative population growth. However, in the era of globalization, mechanical population changes such as population mobility will have a significant impact on the population changes of small countries. Even if the fertility rate of these countries remains above the replacement level of 2.1, the total population may still decline due to population migration. If we only look at countries with a total population of more than 30 million, then only a very small number of them are currently experiencing negative population growth. Therefore, there is not much experience that can be used for reference on the impact of natural population changes on economic development. From a global perspective, since negative population growth has not become a relatively common phenomenon, it is difficult to learn lessons from samples. Due to the lack of experience that can be used for reference, it is difficult for us to envision what changes negative population growth will bring to China, a country with such a huge population.
After the total population reaches its peak, the annual population decline will impose a long-term constraint on economic development from the demand side. This is how population changes affect economic growth. Specifically, it includes both direct impact of population reduction on consumption demand and indirect impact on investment demand.
Direct impact on consumer demand. From the perspective of total factors, China has developed a dual circulation strategy that takes domestic development as the mainstay, with domestic and international development reinforcing each other. The main factor behind the domestic circulation is the large domestic market supported by China’s large population. With the gradual changes of the driving factors for economic growth, consumer demand has accounted for a large proportion of China’s total GDP. In 2020, the GDP calculated by expenditure method is 10.26 billion yuan, of which final consumption is 5.57 billion yuan, accounting for 54.3%. In final consumption, household consumption expenditure was 3.87 billion yuan (27,438 yuan per capita), accounting for 37.7% of GDP.
Population decline will directly bring about a fall in consumer demand. Assuming that before 2030, the per capita consumption level will remain at the average level during the 13th Five-Year Plan period, regardless of price changes, the per capita consumption level will be 35,253 yuan by the end of the 14th Five-Year Plan period and 45,293 yuan at the end of the next five years. During the 14th Five-Year Plan period, population reduction won’t be large, and the impact on GDP measured by the expenditure method will be small. But as negative population growth accelerates, regardless of other factors, the direct impact of changes in consumer demand caused by population decline alone may reduce GDP by 189.5 billion yuan at the end of the 15th Five-Year Plan period.
Indirect impact on investment demand. Since investment demand is driven by consumption demand, negative growth of the total population will indirectly affect the former. Investment demand for infrastructure will also see the arrival of saturation due to the advent of the population peak, a phenomenon that will harm economic growth.
It is necessary to step up policy research in the era of negative population growth, especially to reduce the impact of the reversal of demand-side factors. The following policies should be valued.
First, insist on opening up to the global market to offset the adverse impact on domestic demand. The demand-side impact brought by the negative population growth is an issue discussed under the conditions of a closed economy. With the dual circulation strategy, even if the population sees negative growth, China’s population will remain huge enough to support the domestic circulation for a rather long time in the future. Meanwhile, it is necessary to further open up to the global market, improve the quality and level of opening up, and make use of the growth of external demand as much as possible to offset the negative impact of negative population growth on domestic demand.
Second, improve the income distribution pattern to buffer demand-side shocks. The consumption demand in GDP measured by the expenditure method is related to two factors: consumption level and population size. Therefore, even if the population starts to decline, the growth of per capita consumption level can offset the adverse effects to a certain extent. At present, a large group of people in the country live with a fairly low income level, a fact that hinders the improvement of their consumption level. Improving the income distribution pattern and promoting the income growth of the low- and middle-income groups can help to increase the average consumption level.
Third, future economic development and planning should take into account the adverse effects of population peak. This is a major turning point in China’s basic national conditions, and a situation that the country has never encountered when formulating development plans in the past. In the future, when conducting major project planning, infrastructure investment and resource allocation in regional planning, it is necessary to take into account the transitional changes in the total population, and improve the efficiency of resource allocation.
The views expressed herein are the author’s own and do not represent those of CF40 or other organizations.
