Jiang Tianming: Two major risks will push China’s economy into a downward path

[February 15, 2023]China’s economySignificantly slows in 2022, with economic growth at the fastest pace since 1977second lowest.Although analysts sayChina’s economyThere will be some recovery in the short term, but in the medium and long term, international financial institutions are pessimistic about China’s economic prospects.

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When a country’s economy suffers a serious downturn and it is difficult to reverse it in the long run, the economy will often enter a downward channel. This is exactly what the Chinese economy is currently facing.

February 3,International Monetary Fund(IMF) published inReportChina sharply lowered China’s medium-term economic growth forecast. The agency lowered China’s economic growth rate in five years from 4.6% predicted in October last year to 3.8%, and expects China’s economic growth rate to slow down year by year from 2025 to 2027.

asian development bank(ADB) made a longer-term forecast for China’s economic growth.The agency’s report on China’s long-term economic prospects on December 23, 2022ReportChina predicts that China’s economic growth rate will gradually decline from an average forecast of 5.3% from 2020 to 2025 to an average of 2% from 2036 to 2040.

Both financial institutions pointed to the negative impact of shrinking population and declining productivity on China’s medium- and long-term economic growth.

asian development bankEconomist Dominik Peschel pointed out in a report on China’s long-term economic prospects that in the long run, the shrinking working-age population will put increasing pressure on economic growth.The reduction in the labor force not only affects output, but also indirectly leads toProductivitylow.

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population structureDeterioration makes the economic downturn irreversible

On February 2, 2023, in Haizhu District, Guangzhou City, Guangdong Province, recruiters lined up to wait for job seekers. This scene can not help but make people feel that in China, known as the “world factory”, recruiting is not an easy task . Just after the Chinese New Year, Guangdong, Zhejiang, Jiangsu, Fujian and other coastal provinces in China have organized enterprises to recruit workers across provinces. Only when workers are recruited can enterprises produce and the economy recover.

Unfortunately, after nine consecutive years of decline, China’s working-age population rebounded briefly in 2021, but in 2022, official figures show that the working-age population aged 16 to 59 has decreased by 6.66 million compared with 2021. “Lack of workers” and “difficulty in recruiting workers” are mentioned by more and more companies.

In economics, labor force is one of the important factors of production, and the shrinkage of labor force directly affects the total output.while Chinapopulation structureThe deterioration of the economy makes it difficult to reverse the economic downturn in the long run.

Chinese officials announced on January 17, 2023 that the population will decline in 2022. This is the first time in 60 years that official figures have shown that China’s population has shrunk. The shrinking population has been accompanied by record low birth rates and accelerated aging.

China’s birth rate in 2022 will be 6.77%, the lowest since 1978, and far lower than the 10.41% birth rate in 2019 before the epidemic. The current year-on-year decline in births hints at the number of people reaching working age in the next 15 to 20 years. Hong Kong economist Luo Jiacong once published an article in The Epoch Times on January 25, 2023, pointing out that even if population growth stops declining, it will take 20 years to stop the downward trend of GDP growth.

At the same time, the acceleration of China’s aging has also caused China to lose the demographic dividend of economic development. 2022 is called “the first year of accelerated aging in China” by Luo Shougui, a professor at the Antai College of Economics and Management of Shanghai Jiaotong University, because the baby boomers born in the 1960s will gradually reach the legal retirement age in the next ten years.

The current statutory retirement age in China is 60 for male workers, 55 for female cadres and 50 for female workers. This shows that male workers born in 1962 and female workers born in 1972 have already reached the statutory retirement age of 60 in 2022. According to figures disclosed by the Chinese Society of Social Security, from 1962 to 1972, China’s annual birth population was around 24 million to 29 million. This means that in the next ten years, the number of retirees in China is likely to reach more than 20 million per year.

Some people think that the deterioration of the demographic structure and the reduction of the working-age population can be achieved throughProductivityincrease to make up for it. However, Dominik Peschel, an economist at the Asian Development Bank, said in a report on China’s long-term economic prospects that the reduction in the working-age population has had a negative impact on the overall productivity of society. This is because the working population engaged in agriculture has declined significantly, which has led to a sharp decrease in the labor force moving from less productive agriculture to more productive industries and services.

Production efficiency drops and falls into a vicious cycle

International Monetary Fund(IMF) pointed out in a report released on February 3 that the decline in China’s productivity is mainly due to inefficient state-owned enterprises and the decline in business vitality. The IMF expects the misallocation of resources to less productive state-owned enterprises to continue.

Emilia Jurzyk, a senior economist at the IMF, published an empirical research paper in 2021, comparing state-owned enterprises and private enterprises listed in China as samples, and concluded that the efficiency of Chinese state-owned enterprises is lower than that of private enterprises.

China’s state-owned enterprises often occupy industries of national strategic importance and monopolize most of society’s resources and funds. However, private enterprises with high efficiency have long faced the problem of “difficulty in financing”.

This misallocation of resources not only lowers the productivity of the entire society, but also makes private entrepreneurs less confident in the social business environment. Confidence, however, is crucial to an enterprise. If entrepreneurs lack confidence, they will reduce investment, which will lead to a reduction in future production activities and layoffs.

This creates a vicious circle: reduced production activity can lead to a slowdown or even a recession. Layoffs will increase the unemployment rate in society, reduce people’s income, and affect consumption. Insufficient consumption means a decline in demand, which will further make entrepreneurs lose confidence and reduce investment, thereby reducing business vitality. The decline in business vitality will further reduce production efficiency.

How to solve this problem? Dominik Peschel’s recommendations in his report on China’s long-term economic prospects include: state-owned enterprises need to be reformed, social capital and credit supply need to be optimized, and credit funds need to be invested more in private enterprises, especially small and micro enterprises.

In fact, as early as in 2015 at the Two Sessions (National People’s Congress, National Committee of the Chinese People’s Political Consultative Conference), the CCP listed solving the financing difficulties of enterprises, especially the financing difficulties of small and micro enterprises, as five key reform points one. In August of the same year, the CCP also proposed to deepen the reform of state-owned enterprises. Now nearly 8 years have passed, private enterprises still have difficulty in financing, and the inefficiency of state-owned enterprises is still criticized by the outside world.

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This in itself shows that the decline in production efficiency and the population problem have a very big thing in common, that is, neither of them can be changed in the short term, which naturally makes it difficult to reverse the slowdown of China’s economy in the long run.

(The author Jiang Tianming is a financial analyst in Hong Kong)

Responsible editor: Lian Shuhua#