China’s slowdown may be permanent as demographic time bomb takes its toll

In 2010 China surpassed Japan to become the world’s second-largest economy, and many, including the IMF, are predicting that by 2016 China’s economy will be bigger than that of the United States.

Even if these predictions turn out to be correct, China’s rapidly aging population could mean that its economy is unlikely to remain number one for long.

From demographic dividend to demographic time bomb

Starting in the late 1970s, the ratio of the population of working-age (15-64) to non-working-age grew rapidly. This demographic dividend, coupled with minimal regulation allowed China’s economy to grow rapidly. As a result it is now the world’s largest manufacturing nation.

The problem now facing China is that this beneficial ratio of workers to dependents has reached its peak and is slated to decline rapidly in the coming decades.

China’s ratio of working-age to non-working-age population

Source: Harvard Initiative for Global Health. Population Aging and Economic Growth in China.

By 2030 the median age is expected to increase to 42.5, up from 34.5 today—and is forecast to peak in 2025, nearing 1.4 billion. This will lead to a steadily declining workforce beginning in 2015. Starting that year, China will lose some 36 million people from its workforce over the next decade and a half.

As a result of trends in both fertility and longevity, the elderly share of China’s population has been increasing, and those aged 60 and over are set to form a rapidly growing share of the population. By 2050, it is projected that the population aged 60+ and 80+ will reach 440 million and 101 million, respectively.

China’s aging population

Source: Harvard Initiative for Global Health. Population Aging and Economic Growth in China.

This demographic shift has raised concerns about the future ability of China’s working-age population to support its growing number of elderly dependents. As the population ages, it will place increasing strain on the country’s finances and may well threaten the underpinnings of the economy, which needs a young populace to drive consumption.

These fears have led for many to call for the abolition to China’s one-child policy, however the government is reluctant to alter the policy as it is concerned about feeding its people who account for around one-fifth of the world’s population.

What makes the situation all the more pressing is that unlike Europe, which has aged gradually over the past 100 years, China will make the transition in just three decades. The concern among many economists is that the Chinese authorities are simply not prepared for the social challenges associated with a rapidly aging population that is likely to impede its traditionally strong economic growth.

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