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Population Structure Changes Have Significant Economic Implications

May 20 , 2011
  • Peng Wensheng

    Chief Economist, China Int'l Capital Corporation Limited

The National Bureau of Statistics recently highlighted some significant results from China’s 6th National Population Census which point to major structural changes in population trends with implications for the economy.

These were:
1. The annual growth rate of China’s population has slowed remarkably in the past 10 years compared with the previous decade;
2. The percentages of both working age and aged sections of the populations grew, while the proportion of children aged under 14 fell, indicating an overall aging of the population;
3. Education levels rose and literacy rates continued to increase;
4. The urbanization process is faster than expected, with 50% of the total population living in urban environments;
5, The percentage of permanent residents in developed coastal provinces grew, while it fell for those in underdeveloped heartland provinces.

The results make it necessary to explore the possible effects of this changing population make-up on economic growth, inflation, property prices and the development of financial markets.

A reduction in the labor force will affect the potential growth-rate which is predicated on the consistent supply of workers, capital and productivity. Over the past 30 years, China’s economic growth has been around 10% per year, due largely in part to the three aforementioned factors: rapid growth of labor supply, capital resources founded on high domestic savings rates, and the rising efficiency of production.

As experienced in many developed countries – especially Japan with its seriously aging population – the reduction of labor supply effects economic growth. But the saving grace may be that China is somewhat different, adding uncertainty to the plotting of future economic growth trends. For example, the increasing level of urbanization is good for economic growth. It means that rural labor is migrating from the low productivity of agricultural areas to the higher productivity of modern manufacturing and and service industry zones.

The census figure showing China’s urban population had reached 666 million, or 49.68% of the total population, reveals that China still has a long way to go to reach that standards of both developed countries and other emerging market economies. Also, the income disparity between city and rural workers continues to grow. The figures indicate that there is considerable capacity for improvement, and consequent further urbanization. But conversely in comparison to capacity, the urbanization rate will slow down in the near future, thus decreasing its contribution to economic growth.

The influence of the labor shortage in recent years is a good indicator, as is the growth of labor quality due to better education. The census shows that illiteracy rates fell from 6.72% in 2000 to 4.08% by 2010 and the number of people with university standard education increased from 3611 to 8930 in every 100,000. The improved pool of quality, i.e. better educated, workers means that, with a consistant labor supply, there should be productivity growth. It also means an adjustment to the economic structure from the labor-intensive, sustained growth pattern of the past 30 or so years. During the adjustment period, however, the labor market may suffer from imbalances caused by mismatching of skills to necessary and/or available tasks.

All in all, the reduction in number of working age people – expected to fall sharply in absolute number in the next 2-3 years – will result in a remarkable slowdown in China’s economic growth in the next 5-10 years. Redundant rural labor released from urbanization and the growth of labor quality will partly, though not completely, offset the effect of the reduced total working age population.

According to our estimates of China’s economy, taking into account labor trends, capital and productivity, potential yearly growth over the 12th Five-Year Plan will be between 8% and 9%, slowing remarkably in comparison with 10% in the past decade, and expected to slip during the 13th Five-Year Plan.

Peng Wensheng is Chief Economist of China International Capital Corporation Limited (CICC)

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