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China’s Economic Engine Is About to Start Shrinking

For a few decades now, China has been converging with the US economically. Depending how you measure it, its gross domestic product has either already passed that of its great global rival or is getting ever closer. Average incomes are still much lower in China, but by another key metric of living standards, life expectancy, China matched the US in the pandemic year of 2020. 

As this century progresses, though, it appears that China will be experiencing economic convergence with the US of another, less positive kind. The country’s working-age population of nearly a billion (defined here as those ages 15 through 64) has been essential to its economic rise, enabling it to become the workshop of the world and a vast consumer market. But according to population projections released last week by the United Nations, this cohort will start declining rapidly in the 2030s, and shrink by almost two-thirds by the end of the century. With the US working-age population projected to be about the same size in 2100 as it is now, China’s will go from more than four times larger to less than twice as big. Throw in Canada and Mexico, which aren’t exactly part of the same labor market as the US but do share a free-trade zone, and China’s working-age population is projected to be only 1.2 times bigger.

These projections, from the “medium scenario” of UN forecasters, are arguably over-optimistic about population trends in China. They assume that the country’s fertility rate will rebound from its sharp decline of the past few years and edge closer to that of the US as the century progresses.

The projections may be too optimistic about fertility trends in the US as well, but this country can at least rely on another source of population growth that China hasn’t embraced and probably won’t in the future: large-scale immigration.

The UN also offers a “low-fertility scenario” in which birth rates stabilize at lower levels in both China and the US. In it, China sees its working-age population drop by more than 80%, and North America’s surpasses it in 2097.

The year 2097 is a long time from now, of course, and none of this — beyond the 2030s drop in China’s working-age population that’s already been baked in by the recent decline in births — is fated. The UN has been making long-term population projections since the 1950s, and while these have been quite good at capturing the overall trajectory of global population growth, they’ve often been much less accurate in the particulars. The disappearance of two-thirds or more of the working-age population envisioned for China is unprecedented in the modern world, and the threat of it may bring policy and societal changes that slow or even halt the trend. Lots of other things could happen in the next 75 years to supersede these forecasts: climate catastrophes, world wars, alien invasions, the singularity, you name it.

Also, the UN population forecasts contain other information about future labor supply that may end up being much more important than how China and the US stack up. Africa is projected to be the big gainer, with a working-age population expected to nearly equal Asia’s by the end of the century.  (For its continental/regional groupings, the UN puts Mexico in Latin America and defines “Northern America” as the US, Canada, Bermuda, Greenland and St. Pierre and Miquelon.)

Still, with the working-age population decline that faces China in a few years already underway elsewhere in East Asia — Japan’s 15-64 population has fallen 17% since 1994, while South Korea’s and Taiwan’s appear to have peaked in 2017 and 2016, respectively — the region’s shift from growth to shrinkage is going to be hard to ignore.  Here’s another striking comparison, which I’ve run all the way back to 1950 to get the full effect.

The rise of East Asia has been perhaps the single most important global economic trend of the past half century. What does that imply about its decline?

By “decline” I don’t necessarily mean something akin to the fall of Rome. Japan remains an affluent, advanced economy despite its quarter century (so far) of working-age population decline. But its share of nominal global GDP has fallen to 5.1% in 2021 from 17.9% in 1994. All wealthy nations have ceded GDP share to make room for China and other emerging markets, but the US declined just to 23.9% from 26.1%, and the European Union share declined to 17.8% from 25.7%.

In 2021, China’s share of global GDP was 18.5% and its share of global working-age population was 19.2%. The latter percentage is projected to fall to 6.1% by century’s end. One way for Chinese leaders to prevent an equivalent decline in GDP would be to make reforms and investments that keep per-capita incomes rising faster than the global norm. But as my fellow Bloomberg Opinion columnist Hal Brands and Tufts University China scholar Michael Beckley argued in Foreign Policy last year, fear of reduced economic clout in the future could also elicit a less-productive, more externally aggressive response: “The most dangerous trajectory in world politics is a long rise followed by the prospect of a sharp decline.”

The US faces no such prospect, at least not for demographic reasons. One can even envision it returning to population growth through a renewed embrace of immigration, a more supportive environment for parents or both. At a time of great pessimism among Americans, that’s an interesting prospect to contemplate.

More From Other Writers at Bloomberg Opinion:

Joe Biden Is Fighting the Wrong Battle Against China: Minxin Pei

Thugs for Hire Hint at a More Unstable China: Matthew Brooker

Xi Jinping Is Sending Mixed Messages to Investors: Shuli Ren

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering business. A former editorial director of Harvard Business Review, he has written for Time, Fortune and American Banker. He is author of “The Myth of the Rational Market.”

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