Faced with an ageing population in the 2000s, Japan had difficulty recovering from the property market collapse as the economy was mired in a liquidity trap. China’s current population profile is similar to Japan’s in that time and thus it is wary of Japan’s ‘lost decade’.
Despite China’s one-child policy, implemented since 1979, the national birth rate rose in the mid-1980s as the economy prospered with its ‘open door’ policy. On the other hand, the two-child policy introduced in 2016 had little impact, as birth rates tumbled from 12.4 per 1,000 people to 10.9 in 2018.
Coincidentally, China’s demographic outlook matches the timeline specified in Xi Jinping’s ‘New Era’. By 2035, China’s share of working age population may to shrink below the world’s average.
The contraction of China’s labour force seems to be an irreversible trend. Since capital accumulation is also slowing, China needs to increase total factor productivity to maintain the rise in value-add per labour unit, which is in turn critical to supporting wage growth and consumption.