2.3  Population growth to slow

Economic growth in China is likely to be lower in coming years as demographic changes occur. China's population growth rate has slowed from more than 2% per annum in the 1970s to around 0.5% currently, chiefly as a result of the one-child policy. The United Nations (UN) projects China's total population to increase from 1.34 billion in 2010 to a peak of just fewer than 1.4 billion in 2025 and to decline to 1.3 billion by mid-century (Figure 3.1).[20] The main driver of the decline is a fall in the projected birth rate which is expected to continue to decline from 12.6 births per 1,000 people in the 2006-2010 period, troughing below nine mid-century before picking up slightly to 10.5 by the end of the 21^st century. The declining birth rate is offset to some degree by increasing life expectancy, rising from around 73 years currently to 79 years mid-century (Figure 3.2). China's declining birth rate and rising life expectancy will also bring a decline in the working age population (15-64 years).[21]

The UN estimates that as a result of these changes, China's age dependency ratio (the proportion of the population not in the working-age population), which fell steadily from 48% in 2000 to 39% in 2010, will rise to 46% in 2025. The rate of growth in the working-age population has already slowed from around 3% per annum in the mid-1980s to around 1% per annum currently. The total working-age population is projected to grow from 970 million in 2010, peaking in 2015 at 996 million before declining to 789 million by mid-century. Slowing growth, and subsequent decline, in the working-age population on its own will bring a lower potential growth rate for the economy unless it is offset by a higher rate of labour productivity growth and/or labour force participation. The changing age composition of the workforce with fewer younger, more productive workers may reduce labour quality and productivity, further constraining growth.

Figure 3 – China population projections and demographic changes

Figure 3.1:  China population projections

Source: United Nations

Figure 3 – China population projections and demographic changes (continued)

Figure 3.2:  China demographic changes

Source: United Nations

Increasing life expectancy and a changing age profile will lead to a rise in the median age from 35 years currently to a peak of just less than 50 years mid-century before declining to 46 years by the end of the century. It will also lead to an increase in the proportion of the population aged 65 years and older from 8.2% in 2010 to more than 30% by 2065. While demographic changes will be a negative influence on China's aggregate growth rate, they may also have a positive effect on the composition of growth. The gradual rise in the old-age dependent proportion of the population is likely to lead to a decline in the saving rate as those people draw on their life savings in retirement. A lower saving rate may raise the cost of capital, constraining investment, but it may also assist the rebalancing of the economy from investment towards consumption.

Increasing urbanisation of China's population is likely to support the rebalancing of the economy. As discussed in Bowman and Conway (2013),[22] China's official urbanisation rate exceeded 50% for the first time in 2011. The official urbanisation rate, which is based on those who have lived in an urban area for more than six months during the calendar year, includes an estimated 15% of the population who live and work in cities but do not qualify as urbanised under the hukou (household registration) system; these people contribute to the industrial economy, but because they do not have security of urban residence their consumption patterns are likely to reflect rural households rather than urban ones.

Reform of the hukou system is widely acknowledged as a priority and when it occurs the people affected will contribute more to consumption as the benefits of social welfare schemes are extended to them, without changing the urbanisation rate. This will also contribute to rebalancing of the economy. In addition, Citigroup (2012) estimates that a further 150 million surplus rural workers will migrate to the cities by 2030, taking the urbanisation rate to 70-75% and lifting China's potential growth rate 0.8 percentage points to 8.5% in 2015 and 1.6 percentage points to 7.1% in 2020 from what it would otherwise be. Ongoing urbanisation of the population (in terms of both a change in status under the hukou system and actual migration from the countryside) will require continuing infrastructure investment (eg, housing, transportation networks) and will boost private consumption growth, especially for the high-protein, western-style foods which New Zealand exports.