Demographic Change and China’s Potential Growth

China’s 2020 census data, released in early May, shocked the country’s leadership, prompting dramatic changes in China’s family planning policies to encourage additional births. The numbers suggest that China’s population will peak over the coming decade. Its working-age population has been in decline for several years already. This note explores the links between demographic trends and economic growth and the implications of China’s low birth rate for GDP over the next two decades. Among our findings:

• The economic literature suggests that the demographic changes China is facing will produce falling savings rates, lower investment rates, lower long-term equilibrium interest rates, reduced productivity growth, and deflationary pressure.
• Japan’s experience with a sharp reduction in its working age population over the past two decades offers a cautionary tale for China, consistent with the economic literature.
• China has policy options to mitigate the effects of demographic changes, but China’s long-term growth potential is likely to fall below 4 percent, with risks to the downside.