Abstract: On January 17, 2023 China's National Bureau of Statistics released the latest population figures, which showed an 850,000 drop in population at the end of 2022 compared to the previous year, with a natural population growth rate of -0.60 per thousand. It is the first time since 1962 that China's population has grown at a negative rate. As the total population begins to decline, China will face shocks from both the supply and demand sides. On the supply side, the working-age population will further contract, leading to the decline in the potential growth rate. On the demand side, the fewer consumers as the population shrinks, the lower propensity to spend among the elderly, and reduced income as a result of slower economic growth will drive down consumption growth. In response to these shocks, China should ramp up reform efforts, such as improving income distribution and promoting urbanization.
China is witnessing negative population growth. We as economists are concerned about its impact on the Chinese economy and what should be done to address it.
Ⅰ. POPULATION PEAK: AN ANTICIPATED TURNING POINT
Not every country would experience a population peak, and most countries have yet to experience one. We don’t consider a population to have peaked just because it starts to decrease in the following year. Rather, we refer to a natural phenomenon dictated by fertility rate, where the population reaches a peak and then turns around, never rising again. So when we talk about China’s population peak, we’re talking about this natural process determined by the country's fertility rate.
For a long time, our estimates of fertility rates were inaccurate. In terms of the total fertility rate, or TFR, if a couple or a woman has more than 2.1 children over the lifetime, the population will grow positively in the long term; if TFR is less than 2.1, the population will grow positively in the short term due to inertia but will peak and turn negative in a number of years.
China’s TFR had hovered around 1.7 or 1.8, and the UN's population projections for China were also based on a TFR of around 1.7. As a result, we assumed that China was still a few years away from reaching its population peak and neglected the related issues.
However, the seventh population census in 2020 revealed a TFR of 1.3, which cannot be achieved in a single year, implying that China's TFR has been extremely low for many years.
That foreboded the quick arrival of the population peak. China’s real population growth has deviated widely from the prediction by the United Nations, which revised its forecast in 2022 in view of the latest statistics: the Chinese population would peak in 2022 and start to record negative growth in 2023 .
As the Chinese population contracts, India might replace China as the most populous country in the world as soon as 2023. Itself already an economic challenge, negative population growth also comes with the deterioration of population ageing.
A population is generally believed to begin ageing when over 7% of the people are aged 65 and above; when the percentage is higher than 14%, it enters the advanced stage of ageing; and when the percentage rises above 21%, it becomes highly aged.
The percentage now stands at 14.3% according to the data released by the National Bureau of Statistics in 2021, indicating that China has entered the advanced stage of population ageing, earlier than most of the countries in the world. In Japan, the percentage is already way beyond 21%. That’s where China is headed, too: the UN projects that the Chinese population will become highly aged in around 2030.
With its population at a new crossroad, China also faces a turning point of economic development, as was the case in history. When the growth of the Chinese population turns negative, it could also be an important turning point for the Chinese economy with new challenges that need to be addressed.
II. NEGATIVE POPULATION GROWTH IMPACTS CHINA’S ECONOMIC DEVELOPMENT FROM BOTH THE SUPPLY AND THE DEMAND SIDE
Negative population growth is a matter of time. Demographic changes bring challenges, and we’ve had both success and failure dealing with them in the past.
China already experienced a demographic turning point in 2011, when its working-age population aged 15-59 started to grow negatively, which induced supply-side shocks. First, labor growth slowed and the cost of labor and business climbed up, impairing the competitiveness of Chinese businesses. It was then when the contribution of manufacturing and export to economic growth started to decline. Second, additional labor reduced, dragging down human capital improvement. Third, employers had to replace labor with capital and robots, and when the replacement happened too fast, it twisted investment return, diminishing the return on capital. Fourth, as labor contracted, rural labor moved to cities at a slower pace, reducing the efficiency of resource allocation and productivity growth. Taken together, these factors have pared down China’s potential growth rate.
China’s real productivity growth turned out to be roughly consistent with the estimated potential rate, falling after 2011 as the potential growth rate decreased, indicating that the economy had basically reached potential.
The supply-side shocks will persist and exacerbate when the Chinese population starts to see negative growth. The shrinkage of the working-age population has been relatively mild to this day, providing a buffer; but as total population growth turns negative, the working-age population will contract more rapidly with magnified impacts on the economy.
The good thing is that China has experience tackling supply-side shocks over the past decade by way of supply-side structural reforms. But we should bear in mind the persistence of the supply-side shocks. According to the forecast me and my colleagues at the Chinese Academy of Social Sciences made, the potential growth of the Chinese economy will continue on the downward track. We see two scenarios on the horizon: one is the “medium scenario”, where everything goes as it is now; the other is the “high scenario”, where potential growth improves as a result of intensified reforms.
As the Chinese population growth enters the negative territory this year, I suggest that we aim higher, implementing rigorous reforms proposed in the “high scenario” to ensure that the “medium scenario” growth potential can be realized. Our estimate based on the latest data also suggests that only with strong enough reforms can we deliver the growth target.
International experience suggests that negative population growth also brings demand-side shocks in addition to lower potential growth. For example, population growth in East European and Baltic states (former USSR states) has stalled ever since the 1990s, and their economic growth remained much below that of middle- and high-income countries. Some of the other countries which saw their population growth turning negative in recent years have had negative economic growth, too. Japanese experience also points to negative population growth’s impacts on demand.
III. CONSUMER DEMAND AS AN ENDOGENOUS FORCE DRIVING CHINA’S INTERNAL CIRCULATION
The people of a country are its consumers, so consumption is naturally affected by population growth, which is called the “population size effect”.
In China, the elderly’s income is lower than that of the working-age population, and the social security system isn’t developed enough to fill the gap. Concerned about their future, and even the future of their children and grandchildren, the elderly don’t spend much. This is what we call the “age structure effect”. There is also the “growth effect” or the “income effect” when economic and income growth slows down as population growth turns negative. That’s why China’s population decline has been accompanied by lower GDP and consumption growth.
Negative population growth is irreversible, but behavior and expectation are changeable. According to a study on the propensity to spend of low- and middle-income groups, the additional consumption generated by every 10% increase in income can be estimated. Low-income groups usually receive a stronger boost in their propensity to spend than higher-income groups from income growth.
Hence, improving income distribution can boost total consumption, and that’s where further efforts are imperative. Expanding the middle-income group to build a super-large domestic market is exactly what China pursues through its common prosperity and internal circulation strategies.
A means to that end is pressing ahead with the new, people-oriented type of urbanization, the focus of which should be the urbanization of rural migrant workers, which is an important way for demand-side reform to bear fruits. China’s Gini coefficient is as high as 0.468, half of it owing to the urban-rural income gap, and so narrowing this gap is important to addressing inequality.
Another important supply-side cause for slower growth is labor shortage. Many analysts predict that China will not have a rapid growth rate in the future or emerge as the largest economy in the world because its working-age population and total labor have stopped growing. But despite the shrinking working-age population, there is a tremendous pool of surplus rural labor in China.
23% of the total labor in China are rural labor. In comparison, the percentage in high-income economies is only 3% or 4%. That means China needs to transfer 20% of its labor from rural to urban industries, which is huge given China’s enormous population. The transferred labor from agriculture to non-agricultural sectors is a source of workforce supply unique to China, and urbanization has accelerated the transfer. The transfer also generates higher productivity, as labor moves from low-productivity sectors to high-productivity sectors.
The new type of urbanization creates benefits on both the supply and the demand side, and I would like to emphasize the demand side. The urbanization rate in China now stands at 65%, but only 40% of the population is registered in cities. The 18% gap is the rural migrant workers and their families with rural residence registration. Giving them urban household registration is essential for them to have equal access to public services in order to boost their consumption.
A research team from the OECD proposes that China needs to take two steps to transfer its labor. The first step is to transfer the rural migrant workers to cities, which could boost consumption by almost 30%; the second step is to give them urban household registration which could further elevate their spending by another 30%. Urbanization can thus inject two-fold momentum into consumer spending.
At the same time, urbanization and the tertiary industry could also be mutually-reinforcing. International data on urbanization rate and the tertiary industry’s contribution to total employment reveals a significant positive correlation between the two, which is increasingly pronounced as urbanization becomes more advanced. There was once the idea that the key force driving the advanced stage of urbanization is the tertiary industry. Whether that proves correct or not, rural migrant workers cannot enjoy stable income growth, solid social security support or decent public services unless they obtain urban household registration, and only when this happens can they spend more to boost the tertiary industry and sustain the urbanization process.
The report to the 20th National Congress of the Chinese Communist Party does not contain any quantitative goal for China’s economic growth, but it has set forth a set of ambitious qualitative targets. It says that China is expected to “basically realize socialist modernization from 2020 through 2035”; it proposes a new standard for the country’s per capita GDP that echoes the target under the 14th Five-Year Plan, with the vision to be on a par with a moderately-developed country, that is 23,000 USD, by 2035. To enable that vision, China needs to stabilize and improve the potential growth rate while expanding demand, in order to foster economic development.
This article was the transcript of the author's speech at the 2022 Sohu Finance Annual Conference, first published by Changan Avenue Reading Club on January 19th, 2023. It is translated by CF40 and has not been subject to the review of the author himself. The views expressed herein are the author’s own and do not represent those of CF40 or any other organizations.
