China’s evolution into a global economic powerhouse destined to challenge the United States as the world’s largest economy has seemed inevitable for at least the past decade, but two new reports suggest the road ahead may not be as clear as it once seemed.
On Tuesday, China reported that its population fell in 2022, for the first time in generations. At the same time, the government announced that the growth rate of the Chinese economy slowed sharply in 2022, even before an end to the country’s zero-COVID strategy unleashed a wave of infections that is tearing through the population.
The combination of a shrinking population and slower-than-expected economic growth does not bode well for future output. Government intervention and increased consumer demand once the current surge in COVID infections ends will likely result in somewhat faster economic growth in 2023, but the population decline reflects a long-term problem with which the government in Beijing will need to grapple.
Negative population growth
China’s National Bureau of Statistics reported on Tuesday that the country’s population fell by approximately 850,000 people, to 1.412 billion. The country recorded 9.56 million births in 2022, compared to 10.41 million deaths.
Immigration and emigration were not a major factor in China's demographic changes in 2022. While public interest in emigration soared during the pandemic years, government rules that discouraged foreign travel, long processing times for passports, and tightening of restrictions on the movement of money outside the country meant that China lost fewer citizens to other countries than in the years prior to the pandemic.
Last year marked the first time since the early 1960s — when widespread famine killed tens of millions of Chinese — that the population declined. However, growth rates have been trending downward for years, largely as a result of a decades-long “one-child” policy, which penalized couples who had more than a single son or daughter.
China has since relaxed the policy — even replacing it with incentives to encourage larger families — but public reaction has been lukewarm, and the economic uncertainty linked to the pandemic has not helped boost the economy.
Chinese officials have reported 60,000 deaths from COVID-19 since the beginning of December, but outside experts believe that is almost certainly an undercount. Public health officials outside China estimate there are currently a large number of active infections in the country, possibly in the hundreds of millions, which could lead to significant excess mortality in 2023 as well.
Economic slowdown
China’s economy grew by just 3% in 2022, down from 8.1% the previous year, as a series of sweeping COVID-related lockdowns threw supply chains and regular business relationships into chaos. Except for 2020, when the first wave of the pandemic depressed growth to just 2.2%, 2022 marked the lowest economic growth rate since the end of the Cultural Revolution in 1976.
China’s economic growth had been on a downward trend for several years, after regularly exceeding 10% per year in the first decade of the 21st century. In the five years leading up to the pandemic, growth rates had ticked down gradually, from around 7.5% in 2014 to 6.0% in 2019.
However, the pandemic, and China’s efforts to control it, were only part of the story of the slowdown in growth last year.
The Chinese government in 2022 instituted a wide-ranging crackdown on the country’s burgeoning technology sector, as it sought to maintain a measure of government control over companies that wanted to expand internationally. At the same time, the country’s large real estate sector faced a mounting debt crisis, with many development projects — including buildings in the midst of construction — placed on indefinite hold.
Additionally, U.S. sanctions, particularly those barring the sale of cutting-edge semiconductors, choked off growth for many Chinese firms producing high-tech products.
‘Bounceback’ expectedCraig Allen, president of the U.S.-China Business Council, told Voice of America that his organization expects China to show stronger growth in 2023 as the pandemic eases and the government in Beijing takes various measures to boost demand.
“We’re anticipating a bounceback of growth in the Chinese economy in the near future as the economic impact of COVID-19 begins to fade,” he said. “That said, we’re also anticipating slower long-term growth in the coming years — the days of 7 or 8% growth are probably behind us.”
Allen said that, while growth may slow, his organization anticipates China will continue to enlarge the percentage of its population that can be classified as “middle class,” which he said is good news for American firms looking to sell goods and services in the Chinese market.
“In that same vein, we’re expecting the Chinese government to focus on boosting domestic demand this year,” Allen said. “We could see some policies in pursuit of this goal that help boost quality GDP growth in the next year and as a result, help U.S. companies in the market.”
Demographics a bigger problem
China cannot expect a similar rebound in its population in the foreseeable future. The population growth rate has been trending negative for years, and few experts expect it to reverse in the near term.
However, that does not mean that China is doomed to economic stagnation.
“You don't need to have a very large labor force to have a big economy,” Mary Lovely, a senior fellow at the Peterson Institute for International Economics, told VOA. “Witness the United States. We have far fewer people than China, but we have a larger economy. What you have to have is higher productivity. And this is the problem.”
China, in order to gain higher economic output with fewer workers, needs to drive productivity higher. To some degree, she said, Beijing has recognized this and is already taking steps to do so. China is a world leader in the automation of factories, for example, increasing output while reducing the number of laborers needed.
“The big problem for China is the allocation of investment,” Lovely said. “The state sector has been increasing its share of investment, and the private sector has seen a declining share of investment. Many economists would say this is not good over time, because the private sector has always been more productive than the state sector.”
Human capital
Even if China were to reallocate more investment to the private sector, Lovely said, there is still no guarantee that would result in sharp GDP per capita gains, because the country is also facing a human capital deficit. Educational attainment is unevenly distributed, with much of the rural population remaining under-educated and without access to reliable health care and social support services.
Additionally, China does not have a strong system in place to care for the elderly in a rapidly aging country.
“They've been trying for years to build up their health and retirement sector, and they've made important gains, but they still have a long way to go on that,” Lovely said.
Source: Voice of America