China's birth rate has hit a record low. That could shake the world economy.

Asia's Tech News Daily

China's birth rate has hit a record low. That could shake the world economy.
© China News Service/Getty Images China’s birth rate has fallen to a record low. China News Service/Getty Images

  • A demographic crisis is rumbling in the world’s second-biggest economy, with China’s birth rate at a record low.
  • It stands to destabilize a key engine of the world economy, and could shake China’s closest economic partners.
  • It could also push up global inflation as the well of cheap goods and low-wage workers dries up.

It’s been a rocky year for the Chinese economy, what with the Evergrande crisis and COVID cases shutting down ports.

Yet any short-term issues pale in comparison to the demographic crisis grumbling away in the world’s second-biggest economy.

It could have dire consequences for China in the coming decades and could even reshape the world, as the problem stands to destabilize a key engine of global growth. It could even push up worldwide inflation.

In a nutshell: China, the country with the most people in the world, could actually soon run out of workers.

China’s birth rate hit a record low last year, according to data released by the country’s Bureau of Economic Statistics towards the end of November, with just 8.5 births per 1,000 people. That was the lowest since the data set started in 1978, and is likely the lowest since the 1940s.

At the root of the problem is China’s decades-old one-child policy, abandoned in 2016. Bringing up kids in China is becoming much more expensive and there’s been a major cultural shift, with women increasingly focused on their careers.

China’s population aged between 15 and 64 has been falling ever since 2010, according to data from the World Bank.

Big productivity increases could compensate for the declining worker population, but that has also been slowing quite sharply in recent years.

Craig Botham, chief China economist at Pantheon Macroeconomics, gives it five to 10 years before demographics and slowing productivity growth become major headwinds for China. 

“The growth rates we’ve had historically aren’t coming back,” he told Insider. “It is downhill from here.”

But to paraphrase a famous 19th-century remark, when China sneezes, the world’s economy catches a cold.

After expanding on average almost 10% a year since reforming its economy in 1978, China made up more than 17% of global gross domestic product in 2020, according to World Bank data. Its share of global trade was 15%.

From sub-Saharan Africa to the Caribbean, many countries are now closely intertwined with China, and they need its economy to stay strong.

Through the Belt and Road initiative, China has invested more than $480 billion in construction projects around the world since 2005, according to the OECD. A China slowdown means that money spigot could start slowing down, or even get turned off.

In developed economies, the impact may be less direct but no less worrying.

“Slower growth in China will have a negative impact on the economic development in Europe and the US,” said Hao Zhou, senior economist at Commerzbank, in a recent note. But that’s not all.

“The consequences for inflation might be even much more important,” Zhou wrote.

China is the modern factory of the world, and its cheap goods and low wages have helped keep global inflation low and stable over the last two decades.

Of course, fewer workers means higher wages. That would be good for employees in China and elsewhere. Yet Zhou said it would “probably bring back stronger inflationary pressures globally.” That’s the last thing western politicians and central bankers want.

Add it all up and Botham says it’s “far from a foregone conclusion” that the Chinese economy will overtake that of the US, as many have long predicted.

Instead, China could well be on the same trajectory of Japan, where an ageing population has caused growth to slow to a crawl. China may yet innovate its way out of the population trap, but the easy growth is over.

The big question is whether the world catches an economic cold in the meantime.

Read the original article on Business Insider

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