Why has China’s birth rate declined?
China just recorded the lowest number of births since the Great Famine, and it’s important to understand why this matters.
Over the last decades, China has engineered a tremendous cocktail of both structural and cyclical growth.
A) In the last 40 years, the Chinese working age population grew from 600 million to >1 billion. That’s a whopping 67% increase (!) in the amount of people that could actively contribute to economic growth.
B) Productivity trends have been very favorable especially until 2011, although they have started to stagnate over the last decade. Especially in the early 2000s, as China joined the WTO and applied several reforms to reduce external trade and internal migration barriers, productivity picked up very strongly (+22% between 2003 and 2011 alone!).
But things are now deteriorating from both angles, especially when it comes to demographics.
The lagged effect of the one-child policy and the widespread population aging will take a big toll on the Chinese working-age population over the next decades: in the United Nations medium fertility scenario, the Chinese workforce will shrink from >1 billion now to around 700 million by 2065.
This means Chinese structural growth rates are bound to slow down pretty remarkably, and the Chinese business model needs to adjust pretty quickly to deal with this.
In his famous July 2021 speech, Xi Jinping said “that we needed to shift the focus to improving the quality and returns of economic growth, to promoting sustained and healthy economic development, and to pursuing genuine rather than inflated GDP growth and achieving high-quality, efficient, and sustainable development”.
Lastly, the transition from a cheap-labor, export-oriented country to a more domestic-demand centered economy is likely to be painful and involve plenty of de-leveraging episodes, and it is extremely important to closely follow this process as its relevance for global macro portfolios can’t be underestimated.