a gradual, more sudden change

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

“While the focus on shared prosperity has faded, it is likely to reappear. Rising inequality is one of the strongest legacies of the pandemic and a challenge for most economies.


China’s demographic challenges have been piling up for some time. It has 50% more citizens between the ages of 40 and 59 than those under 19. Some studies suggest a halve the Chinese population at the end of the century.

China’s working-age population peaked in 2014 and the pandemic may have advanced a peak in its total population through 2021, with this year’s decline being the first since the Great Famine of 1959-1961.

Contemporary developments are stimulating these trends. Births in China were relatively stable at 15 to 17 million per year in the two decades before the pandemic. This fell to 12 million in 2020 and 10 million in 2021. The fall in 2020 was global, but China is one of the very few economies that did not report any rebound in births in 2021. It also recorded a decline of 12% weddings in 2020.

Deteriorating demographics have wide-ranging implications. They reduce the demand (fewer consumers) and supply (fewer workers) of an economy and increase its dependents (retirees) and net savings drain (pensions).

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

Real estate and construction

These trends combine with issues that are themselves constraints, including the climate, shared prosperity and the real estate sector. While the focus on shared prosperity has faded, it is likely to reappear. Rising inequality is one of the strongest legacies of the pandemic and a challenge for most economies.

Real estate accounts for 26% of loans in the financial system. A 2020 US National Bureau of Economic Research (NBER) article estimates that the sector contributes 29% to the country’s annual Gross Domestic Product (GDP) growth and lately the sector has become a political target.

Macroeconomic policy has limited the leverage of housing and the financing activities of real estate developers have in some cases been limited at the corporate level. House prices in China have not risen sharply during the pandemic as they have elsewhere. Leaders reversed the property policy crunch at the end of 2021, but their long-term strategy for reshaping the sector has not changed.

These developments weighed on GDP; a trend that 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 has not yet ended.


Much depends on China’s ability to implement productivity-enhancing reforms.

ANZ Research’s view is that its historic growth miracle has been based primarily on ‘convergence’ – perspiration, not inspiration. It must now lead local solutions and reforms. But the “middle-income trap” highlights that few economies do this smoothly, if at all.

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

Still big, but different

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

Experience from other economies suggests that this should be our central expectation. In their analysis of 60 years of data for over 180 economies in a 2014 US NBER article, Pritchett and Summers note that “the most robust empirical conclusion on economic growth is the low persistence of growth rates”. We should expect economic growth to fall to the global average.

A slower growing China will remain a very large economy. But the economic opportunities will be different; maybe less consumption of fossil fuels and steel, but more investment in renewables and digital; less new childcare and education infrastructure, but more facilities for retirees.

The pandemic is likely to trigger the next stage of China’s slide back to average global growth rates of 2-3%. With apologies to Hemmingway, China’s gradual slowdown has become more sudden.

Richard Yetsenga is Chief Economist at ANZ

This article originally appeared in Singapore’s Business hours

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