Demographic challenges to China’s Economic Growth


China has set its lowest GDP target in the decades. Unprecedentedly, this year China’s GDP target is set at 5.5% in 2022, the lowest since 1991. Following real GDP growth of 2.3% in 2020, China’s economy was projected to grow by 8.5% in 2021 largely driven by base effects but affected by Covid and US china trade war. The target was announced by Li Keqiang, China’s Premier, at the country’s annual legislative session held in Beijing. Mr. Li described this year GDP target as representing “a medium high rate of growth” which according to him would show china’s ability to move proactively given various challenges to the economics like US china trade war and coved 19.

Mr. Li also described the fiscal deficit of 2.8% of the GDP in 2022 down from last year 3.2% in 2021 target the government has stated that this is more sustainable growth rate. Beijing said it would also offer cash-strapped local governments larger fund transfers from central authorities. Funds transferred from the central government to local authorities will increase 18% this year; the Premier also described it as the biggest jump of the year. He said Beijing would maintain the previous year’s cap of 3.65 trillion yuan, or $577.8 billion, for local government special-purpose bonds, which are primarily used to fund infrastructure projects. Last year’s total issuance was 3.43 trillion yuan. China is the first country affected by Covid 19 and took lockdown for the first time which caused decline of economic growth about of 6% only in 2020. But after that in 2021 the country has mounted a recovery with an economic growth of 8.5% by the end of the year. The outbreak of Covid 19 in china would cause a 2.2-3.09 percent drop in china’s GDP.

Considering the situation at home and abroad, the risk and challenges facing the country’s development have increased significantly this year. Mr. Li told in a meeting of China’s Communist Party (CCP) controlled parliament. He stated that “The harder things get, the more confident we must.”   Raymond Yeung, chief economist based in Beijing, argued that the growth target of 5.5% is aggressive. He further suggested that the government is willing to do more to arrest the prosperity slums.

While a number of socioeconomic and political challenges abound, Raymond Yeung added about a newfound challenge to China’s future economic growth: the trend of dependency of old age population. In the next coming years china having high savings rate is supporting the global market. Moreover China has the world’s highest saving rates among individuals further many investers are investing their cash.  Experts have argued that china aging problem goes beyond the one child birth policy. Yeung while giving his thought to the CNBC suggested that china has to boost its labor market instead.

Thirty years ago, china was not even the part of the world economy. It was been recognize by WTO on 11 December 2001 now, it is the second largest economy in the world. Chinas will become a high economy in either 2025 or 2030 by that criteria, but this is going to transform the world economy because the existing population contributes 16% population of the world while such a huge population is a blessing, it is also a challenge.

Beijing relaxed its coercive one-child policy in 2016, allowing all couples to have two children, and then announced last month that it will allow all couples to have three children. But this is unlikely to boost the country’s long-term population growth, and projections made before the policy shift show that the current population, 1.4 billion, will be roughly the same in 20 years. We already know that in 2040 the over-65 contingent will be vastly larger while the key cohort of younger workers (today’s children) will be dramatically smaller. Given this demographic challenge together with other factors, the next 20 years won’t see a repeat of the phenomenal economic success that China enjoyed over the past 40 years. China’s era of heroic economic growth could possibly come under stress.

China is certainly capable of generating creditable rates of economic growth for the foreseeable future. However, its economy will grow by an average of 3% a year over the next 20 years, according to an estimate from Stanford University’s Scott Rozelle and his colleagues that uses a human capital-based model emphasizing the relationship between education and productivity. Estimates suggests that China’s economic growth is based on four factors—health, education, urbanization and business climate—is roughly 2.5% a year for 2025 through 2040 in purchasing-power-parity terms and a somewhat higher rate in exchange-rate terms. By taking into account demographic factors, these projections are lower than most estimates.

According to the country’s National Bureau of Statistics China’s working age population shrank by more than 5 million people in the last decade as births dropped,. The country is still feeling the effects of the one-child policy enacted in the late 1970s to control its rapidly-growing population. Qin, the first Qin Emperor, is of the opinion that “In the past, almost all the work is manual. After automation, nearly half of our workers’ job is done by machine. It reduces our work intensity,”. Qin’s situation highlights a broader trend in China — the push toward automating jobs. The labor market in the world’s second-largest economy faces some big challenges, including an aging population and rising wages.

Jonathan Woetzel, senior partner at McKinsey, argues that “It’s still rapidly evolving that aging population is a reality, China’s now facing the challenge of potentially getting old before it gets rich.”

According to Tony Han, CEO of WeRide, argues that “One (of the issues) is the shortage of labor, especially in the concept of aging society. In China, and also in U.S., in most of the … developed countries, human labor is getting more and more expensive. People need better pay, need more welfare.”

Now how China does plans to overcome this challenge? China is on the global forefront of Artificial Intelligence (AI) in terms of technology advancement and market applications. China’s unique technology, market, and policy contexts in the growing AI sector have provided them with a window of opportunity to quickly catch up with global leaders in emerging technologies. China’s vast market offers businesses not only advantages in big data, but also tremendous economic incentives to ensure transfer of technology. Although chipsets have traditionally been a weak point in China’s information and communication technology (ICT) business, Chinese companies have recently made significant progress in AI chipsets. China’s development of AI processors is relatively fast. Firms are motivated to [produce AI chips] once if there is a market opportunity. Because of China’s massive market capital, the ICT industry gets benefits from tremendous economies of scale, which means that investments in cutting-edge technology pay off swiftly.

The largest Chip maker in the world is Taiwan’s (TSMC) Taiwan semiconductor manufacturing company. TSMC has built plants in China many years ago. China always have forward planning, TSMC is also run by Chinese. Anticipating a possible US pressure to ban supplying chips to Mainland China, Taipei started building plants in Beijing to facilitate trade with China. It is not only the chipset industry but also almost all manufacturing industries from Taiwan has subsidiaries in Mainland china. In fact, plants in Mainland China are much larger than their plants in Taiwan itself.

China’s efforts of self-independency over the next five year have propped up this china aim to increase research, development and investment which has touched seven percent each year. It will play an important role in china’s development of advanced technology listed in the plan including artificial intelligence, biotechnology, blockchain, quantum computing and robots. China’s self-reliance has been accelerated by the United States efforts including sanctions against top Chinese tech giants such as the Huawei. The US has also blocked Chinese companies from accessing critical technologies including semiconductor, a critical component in many advanced technology. Growing attention towards and reliance on AI will help China improve its industrial and technological efficiency; yet, only time will tell to what extent does this helps Beijing mitigate the mounting demographic challenges in the years ahead.

Comments are closed.

Subscribe to Newsletter