By Yi Fuxian, Project Syndicate | March 11, 2025
No matter what China does, its economy’s momentum will be sapped by an aging, shrinking labor force, past overdrafts of public spending, and weak consumption. While the country is often now compared to Japan three decades ago, its outlook is actually much bleaker.
MADISON – On January 1, Chinese President Xi Jinping published an article reaffirming his longstanding belief that the East is rising, while the West is declining. But in his farewell address just weeks later, outgoing US President Joe Biden made a point of saying that the US has “pulled ahead in [its] competition with China.” Biden saw what Xi would prefer to ignore: the demographic foundation of China’s economy is crumbling.
This problem is not new. Back in 2016, I told the New York Times that China’s aging population and shrinking labor force would prevent its economy from overtaking America’s – a conclusion I had arrived at in the 2007 and 2013 editions of my book Big Country with an Empty Nest. Chinese authorities were not happy. I immediately went from being a state guest to a name on the government’s blacklist. Then, in 2019, I angered the authorities again by publishing a commentary bearing the headline: “Worse than Japan: how China’s looming demographic crisis will doom its economic dream.”
According to the dominant narrative at the time, the “Chinese century” was “well under way” (as The Economist put it). Nonetheless, my findings met with a receptive audience. In the introduction to a November 2020 Brookings Institution book on “the future of US policy toward China,” my commentary was the sole reference listed. (The author, Jeffrey Bader, had been one of the principal architects of the Obama administration’s “pivot to Asia.”) Since then, the dominant narrative has shifted, with many more analysts warning of China’s “Japanification.”
Japan’s experience has confirmed that demographics matter for economic growth, and this will remain the case regardless of whether one looks at Germany, France, China, or any other country. Owing to a rapidly growing workforce and a young population, Japan’s GDP grew from a mere 9% of US GDP in 1960 to 73% in 1995, and its per capita GDP grew from 17% of America’s to 154% in the same period. By 1990, Americans had come to regard Japan as their chief rival, with polls showing that three times more Americans feared the economic threat posed by Japan than the military one posed by the Soviet Union.
Yet Japan’s GDP growth rate has been lower than America’s since 1992. That is when its ratio of working-age people (15-64 years old) to people over 65 began to fall below that of the United States. By then, its median and mean ages were five and three years above America’s, respectively, and its proportion of elderly people had already exceeded America’s the prior year. Its prime-age labor force (aged 15-59) has been declining since 1995, whereas America’s will continue to grow throughout this century. As of 2024, Japan’s GDP had fallen to 14.5% that of the US, and its per capita GDP had fallen to 38% of the US level.
South Korea followed a similar trajectory. In 2019, its median and mean ages were five and three years above the US, respectively; and, in 2021, the share of those over 65 exceeded that of the US. Its labor-to-elderly ratio will fall below America’s next year, and its GDP growth rate has been lower than America’s since 2021.
More Japanese Than Japan
China’s trajectory has been similar to Japan’s, except that its fertility rate is even lower. In 2000, 2010, and 2022, Japan’s fertility rate (children per woman) was 1.36, 1.39, and 1.26, respectively, whereas China’s was only 1.22, 1.18, and 1.05. China is now struggling to stabilize its fertility rate at a meager 0.8 – less than half the “replacement rate” (2.1). Its prime-age labor force has been shrinking since 2012, when its three-decade run of double-digit GDP growth ended.
Thirty years after peaking, Japan’s prime-age labor force has shrunk by 19%, while China’s will have declined by 31% 30 years after its peak. Moreover, China’s total population began to decline in 2018, only eight years later than Japan’s. By 2100, Japan’s population will still be 60% the size of its peak, while China’s will be only 25%. China will have lost the vast majority of its consumers, producers, and taxpayers.
By 2027, China’s median and mean ages will exceed America’s by five and three years, respectively. Its proportion of elderly and labor-to-elderly ratio will be worse than America’s by 2031 and 2034, respectively, and its GDP growth rate will likely fall below America’s as early as 2029. Its GDP will never exceed the US level, and its per capita GDP will barely reach one-quarter of America’s.
To be sure, though China’s proportion of elderly and labor-to-elderly ratio are now equivalent to Japan’s in 1997 and 1995, respectively, its GDP growth rate is much higher than Japan’s was then. But this is partly because China’s economic growth has been overdrawn. For example, its GDP increased at an average annual rate of 5.7% from 2015 to 2024, compared to 3.2% for Japan between 1986 and 1995. But now consider what China’s growth rate would have been without a massive property bubble (much larger than Japan’s) and vastly overbuilt infrastructure.
With its property bubble bursting and its infrastructure entering a period of maintenance and depreciation, China is feeling the pain of repaying its overdraft. In many ways, its economy is looking even more Japanese than Japan’s. Real estate accounts for 70% of Chinese household wealth, and it has shrunk by $18 trillion since 2021. Consequently, households are reluctant to open their wallets, and local governments – whose finances are highly dependent on land sales – are heavily indebted. To fill the budget gap, police have been crossing provincial borders to raid companies and strip them of assets (what Chinese social-media users call “offshore fishing”).
Worse, China’s weak consumption has brought on deflation. “We build the walls of the house out of wood, but it’s the rooms that make it livable,” observed the Chinese philosopher Lao Tzu more than 2,500 years ago. Most countries’ “rooms” (final consumption) account for 75-80% of the “house” (the economy). But in China, the rooms are closer to 55% of the house, and the “walls” (production) account for 45% – resulting in chronic overcapacity.
This imbalance is a legacy of the one-child policy, which reduced the number of children, who are a major source of consumer demand. While women have much more spending power than men – controlling or influencing 85% of household expenditure – decades of sex-selective abortion have left young Chinese women in short supply. As a result, families with boys limit their spending so that they can save up for high bride prices and starter apartments.
Other factors weighing on consumption include concerns about elder care among the many Chinese with no siblings, weak social safety nets, and rising income inequality. Together, these factors have produced the world’s highest savings rate. In 2023, over half of Chinese pensioners (primarily rural seniors) received an average of only CN¥223 ($32) per month. Although China’s 298 million rural migrant workers earn less than half of what urban workers do, on average, their savings rate is twice as high – a staggering 70%.
When other countries have reached China’s current rate of enrollment in higher education, their service sectors have provided 70-80% of jobs, on average. Yet owing to underconsumption, China’s service sector accounts for only 45% of jobs, which means that college graduates struggle to find employment. In desperation, many young people have chosen to “lie flat” (tang ping), withdrawing from careerist competition to live a less materialistic life, or “emigrate” (rùn). Both trends imply a further reduction in China’s marriage and fertility rates.
Weak consumption and reliance on manufacturing to create jobs have also led to “involution” (neijuan) – meaning excessive competition and diminishing returns – among Chinese companies. In 2023, China generated a manufacturing surplus exceeding $1.8 trillion, which was 334 million times its per capita disposable income that year. As China’s share of global GDP increased from 4% in 2001 to 17% in 2023, its manufacturing surplus as a percentage of global GDP increased from 0.1% to 1.8%.
Hard Times Ahead
China’s manufacturing surplus was the context for the trade war that US President Donald Trump launched in 2018, during his first term. If Trump imposes sweeping tariffs and keeps them in place indefinitely, other countries will have to impose their own tariffs on Chinese imports, and China will have lost the ace that it played in response to Trump’s tariffs the first time: “re-exports” through third countries.
To prepare for such scenarios, China is investing heavily in automation technology. But this could further reduce jobs. If global manufacturing is about to enter an AI-driven age, China’s manufacturing advantages will diminish, because the market will have the final say. The weaknesses stemming from China’s insufficient domestic demand will become increasingly prominent.
The best option for Chinese authorities is to try to boost consumption by raising household disposable income from 44% of GDP to the international standard of 60-70%. But even this would not do very much at this point. An economic slowdown and increased government spending caused by aging pushed down household disposable income as a share of GDP from 62% in 1994 to 52% in 2023 in Japan, and from 67% in 2000 to 59% in 2022 in Taiwan.
No matter what Chinese authorities do, the economy’s momentum will be sapped by an aging, shrinking labor force, past overdrafts, and weak consumption. The Chinese Century has turned out to be a short one. In fact, China’s long-term economic outlook is even bleaker than Japan’s.
Yi Fuxian, a senior scientist at the University of Wisconsin-Madison, spear-headed the movement against China’s one-child policy and is the author of Big Country with an Empty Nest (China Development Press, 2013), which went from being banned in China to ranking first in China Publishing Today’s 100 Best Books of 2013 in China.
Copyright Project Syndicate
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