Will China grow old before it grows rich?

China aims to become a high-income country. Can the world’s second largest economy achieve this without the favourable demographic tailwinds that helped shape the preceding four decades?

 

Need to know China is now faced with a shrinking workforce and rapidly aging population. To realise its ambitions, China will have to avoid falling into the middle-income trap. A combination of economic reforms and political changes would make it much easier for China to achieve the goal of becoming a moderately-developed country by 2035.

 

A demographic winter

China is going to have to contend with an extreme example of a coming demographic winter. According to the latest demographic forecasts from the United Nations (UN), the Chinese population may well shrink from a peak of just below 1.5 billion to somewhere between 600 and 800 million by this century’s end. A halving of its population will make extremely difficult for China to overtake the US as largest economy, especially as the US is expected to have a slightly increasing or stable population.

 

Avoiding the traps

China needs to avoid the so-called middle-income trap if it is to meet specific economic targets. A country caught in the middle-income trap has lost its competitive edge in the export of manufactured goods and is unable to keep up with more developed economies in the high-value-added market. China’s ability to follow in its neighbours’ footsteps and become a high-income country depends on their ability to rebalance their economy and do so while avoiding a (cold) war with the US.

China requires multiple economic transformations to come from a manufacturing-dominated to consumer-driven economy, and prepare for the grey tsunami at the same time. The looming demographic winter will not make it any easier.

 

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