China’s economic momentum wanes amid aging population and debt crisis

In March, Chinese Premier Li Qiang set an ambitious economic growth target of 5% for 2024, a goal supported by former World Bank chief economist Justin Yifu Lin. Lin projected that China's economy could expand at an average yearly rate of 5-6% over the next decade, slowing to 3-4% between 2036 and 2050. He suggested that China might reach high-income status as early as 2025 or 2026. However, the country's aging population casts doubt on these projections.

Lin noted that 26 countries had a GDP per capita less than half that of the United States when their populations started aging. Despite this, these nations managed to enhance their economies, a feat he believes China can replicate. The World Health Organization defines an aging economy as one where those aged 65 and above surpass 7% of the population, a milestone China reached in 1998. By 2023, this demographic had grown to 15.4% in China.

Historically, no nation has maintained a 4% growth rate for 12 years after their elderly population reached 15%. During this period, the average growth rate for high-income countries is 1.8%. The aging population impacts production, consumption, entrepreneurship, and innovation, leading to slower GDP growth. As the median age rises and the proportion of elderly increases, economic vitality diminishes.

Lin's forecast of a 5-6% annual growth rate for China from 2024 to 2035 seems unlikely, akin to an octogenarian winning a marathon. China's late development stage is offset by its rapidly aging population. Demographic challenges and a shrinking workforce have caused GDP per capita to decline in Spain, Greece, and Portugal, with similar risks for South Korea and Taiwan.

China's situation parallels Japan and Germany, where workforce contraction in the mid-1990s led to significant GDP per capita declines. In 2023, China's median age and proportion of elderly mirrored Japan's in 1995 and Germany's in 2000. Following these demographic shifts, Japan and Germany saw average annual growth rates of 0.8% and 1.4-1.5%, respectively. China's growth rate is likely to slow to 3% by 2028 and dip below the U.S. rate between 2031 and 2035.

In 2023, China's per capita GDP was $12,681, below the World Bank's high-income benchmark of $13,845. With an average annual increase of 2.1% over the past twenty years, this benchmark is expected to rise to $15,715 by 2028 and $18,219 by 2035. If China's per capita GDP growth slows to 5% in 2024, 3% in 2028, and 1.5% in 2035, it is projected to reach $17,893 in the next decade. The widening economic gap between China and the U.S. could pose additional challenges.

Factors such as a devalued yuan, a shrinking workforce, and the shift of industrial value chains to Belt and Road Initiative participants complicate China's escape from the middle-income trap. Western efforts to reduce reliance on Chinese supply chains could further weaken its manufacturing sector and trade surplus.

As China's economic momentum wanes and local authorities face a debt crisis, a drop in Chinese interest rates is expected. Globally, low birth rates could lead to low inflation or deflation. China's low fertility rate, weak domestic demand, and surplus capacity could amplify deflationary forces, increasing the interest rate disparity between the Renminbi and the U.S. dollar.

If the high-income benchmark remains constant, China might achieve it. However, its rapidly aging population could hinder escape from the middle-income trap. In 2023, China's per capita disposable income was $5,565, well below the high-income threshold range of $8,307 to $9,692. To exceed the high-income benchmark, China's GDP per capita needs to rise to $19,000-22,000, necessitating significant reforms.

China must increase household disposable incomes and address demographic issues, requiring comprehensive political and economic reforms. Given China's current reluctance towards economic reforms, swift change is improbable, potentially taking decades.