China economy: a gradual shift, more suddenly

Much of the current China focus is on the economic challenges brought by the pandemic. ANZ Research expects China to record growth near 5 per cent this year as restrictions ease and stimulus gains traction. But its structural shifts have fundamental and far-reaching implications.

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There are several instances of economies beset by apparent short-term shocks that ended up being lasting economic changes. Neither Australia after the 2000s boom nor Japan after its bubble burst in 1991 returned to previous rates of growth. The pandemic could well be such a tipping point for China.

“While the focus on shared prosperity has faded, it is likely to re-emerge. The widening in inequality is one of the pandemic’s strongest legacies and a challenge for most economies.”


China’s demographic challenges have been building for some time. It has 50 per cent more citizens aged 40 to 59 years than those under 19 years. Some studies suggest a halving in China’s population by the century’s end.

China’s working-age population peaked in 2014 and the pandemic may have brought forward a peak in its total population to 2021 with this year’s decline the first since the great famine of 1959–61.

Contemporary developments are spurring these trends. Births in China were relatively stable at 15 to 17 million per year in the two decades before the pandemic. That fell to 12 million in 2020 and to 10 million in 2021. The fall in 2020 was global but China is one of the very few economies that didn’t report a bounce in births in 2021. It also recorded a 12 per cent fall in weddings in 2020.

Deteriorating demographics have widespread implications. They reduce an economy’s demand (fewer consumers) and supply (fewer workers) and increase its dependants (retirees) and the net savings drain (pensions).

China’s pension system does little to ameliorate these concerns. The national pension system is expected to be in deficit by 2028 and that was calculated in 2018 before the pandemic worsened trends. In April, the State Council established the country’s first private pension system but that will take decades to reach a critical mass.

Real estate and construction

These trends are coalescing with issues that are themselves constraints - particularly climate, shared prosperity and the real estate sector. While the focus on shared prosperity has faded, it is likely to re-emerge. The widening in inequality is one of the pandemic’s strongest legacies and a challenge for most economies.

Real estate accounts for 26 per cent of financial system loans. A 2020 US National Bureau of Economic Research (NBER) paper estimates the sector contributes 29 per cent to the country’s annual gross domestic product (GDP) growth and lately the sector has become a policy target.

Macro policy has constrained housing’s leverage and property developer financing activities were, in some cases, constrained at a company level. House prices in China haven’t risen strongly during the pandemic like they have elsewhere. The leadership reversed property policy tightening in late 2021 but its long-term sector-reshaping strategy hasn’t changed.

These developments have weighed on GDP; a trend the demographics are likely to accelerate. Japan’s experience is instructive. Its population peaked in 2008 but the working age population peaked in 1995 when housing starts also began a decline that is yet to end.


Much depends on China’s ability to deliver productivity enhancing reform.

ANZ Research’s view is its historic growth miracle has been based primarily on ‘convergence’ – perspiration not inspiration. Now it must pilot home-grown solutions and reforms. But the ‘middle-income trap’ highlights few economies do this smoothly, if at all.

If, as Michael Pettis suggests in a recent Carnegie Endowment for International Peace blog, China follows the path of other economies, its non-productive investment is unlikely to be substantially replaced by productive investment, meaning economic growth will slow sharply. The Lowy Institute’s Roland Rajah and Alyssa Leng similarly suggest the prospect of quick growth is “well beyond China’s track record in delivering productivity-enhancing reform”.

Still big, but different

China’s economic growth has slowed consistently since 2007 and is likely to continue to do so.

The experience of other economies suggests this should be our central expectation. In their analysis of 60 years of data for over 180 economies in a 2014 US NBER paper, Pritchett and Summers note “the single most robust empirical finding about economic growth is low persistence of growth rates”. We should expect economic growth to decline to the global average.

A slower growing China will still be a very large economy. But the economic opportunities will differ; perhaps less fossil fuel and steel consumption but more renewables and digital investment; less new childcare and education infrastructure but more retirement facilities.

The pandemic is likely to spark the next stage of China’s regression towards mean global growth rates of 2 to 3 per cent. With apologies to Hemmingway, China’s gradual slowdown has become more sudden.

Richard Yetsenga is Chief Economist at ANZ

This article was originally published in Singapore’s Business Times

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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