The Impact of China’s Shrinking Population

Published on03 JUN 2021

The article below is from our BRIEFINGS newsletter of 03 June 2021

With China’s shrinking working-age population expected to have a widespread impact on its economy, we sat down with Goldman Sachs Research’s Maggie Wei, who recently published research analyzing the implications.

Earlier this week, China moved from a two-child policy to a three-child policy  in an attempt to raise the country’s birthrate. Do you expect this policy shift will pay off?

Maggie Wei: Our view is that it’s likely to have a very small impact on overall population growth. When policymakers allowed couples to have two children in 2016, there was a 20% increase in new births but the effects have started to fade in recent years. Families are much less willing to have more than two children. For example, a 2020 survey conducted by the School of Social Development and Public Policy at Fudan University found that a majority of respondents considered having two children as “ideal.”

So what could the path of China’s population look like?

Maggie Wei: We ran an analysis projecting China’s overall population until 2030 under various scenarios. The upshot of our analysis is that China’s population will likely peak in the next few years. Even if the birth rate limitations were completely removed, barring other policy changes, the overall population will probably peak in the next five years. Additional measures to encourage fertility could also be announced. Other countries with declining populations, for example, have tried to boost fertility by directly compensating families for the economic cost of children through tax incentives and fiscal transfers, or by adding more support for mothers through parental leave entitlement and childcare provisions.

What impact could an aging population have on China's economy?

Maggie Wei: In our view, a shrinking working-age population will likely lower overall economic growth by reducing the potential GDP level and slowing potential GDP growth, holding labor productivity constant. In addition, population aging increases the burdens of supporting older people. Since working-age adults tend to work and save more than the young or those aged 60 and older, an economy with a greater working-age population is generally assumed to have higher savings rates, which would add to GDP growth by boosting investment rates. We do note that in China, however, the precautionary savings rate has been strong even for those aged 60 and older. Population aging would also change the structure of the economy, as the production-to-consumption ratio changes for different age groups. The typical life cycle theory suggests that people tend to consume less and save more during their working years but inevitably consume more as they age. As a result, we could see a negative correlation between the production-to-consumption ratio such that consumption increases as the working-age population drops.

And how could an aging population affect the interest rate landscape?

Maggie Wei: In terms of interest rates, aging populations could drive real rates in different directions. First, an aging population could reduce real interest rates, as potential economic growth tends to slow along with lower growth in the labor inputs. The demand for investment and return on capital, in turn, would then naturally decline. For example, academic research using a model of overlapping generations suggests that population aging could explain a large part of the decline in Japan's real interest rates over the past 50 years. Loanable funds—that is, household savings that are available for lending—could also increase or decrease along with population aging, depending on how people save. If the overall savings rate declines along with population aging, natural interest rates should increase, and vice versa. The linkage between population aging and inflation is complicated by monetary and fiscal policies and, relatedly, by the relative speed of adjustment between aggregate demand and supply. Taking Japan as an example, the county’s graying population was found to have created disinflationary pressures through declining overall economic growth, falling land prices and large fiscal consolidation needs.


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