China Is Growing Old Before It Gets Rich: Economist

Though China's policymakers have portrayed economic growth prospects as sunny, a Chinese demographer warns that the country is unlikely to escape the middle-income trap.

China must institute sweeping reforms to overcome the gap between its economy and that of the United States, all while battling a rapidly aging labor force, stagnating manufacturing sector, plummeting fertility rate, and local government crises, University of Wisconsin-Madison senior scientist Yi Fuxian warns.

Earlier this month, Chinese policymakers again set an annual economic growth target of 5 percent after announcing the country's gross domestic product exceeded 5.2 percent last year, a figure some economists have disputed.

The world's second-largest economy could well exceed this goal, according to Lin Yifu, dean of the Institute of New Structural Economics at Peking University and member of the standing committee of the Chinese government's top political advisory body.

GDP per capita goals: half America's by 2049?

In a recent interview with Chinese state-run media outlet the Global Times, Lin said China has accounted for the challenges posed by its greying population and has boosted investments in education to raise the productivity of its younger workers.

He did not address China's high youth unemployment, which the government stopped reporting on last year before introducing a new reporting methodology that excluded those in rural areas and who have given up looking for work.

Lin said he believed China could not only achieve high-income status within two years but also reach half the U.S. GDP per capita by 2049, and its economy as a whole would be double the size of the U.S.

Per capita income is the average income per person in a specific area in a given time period.

The year 2049 is significant for Beijing's Communist Party leadership, as it will be the centennial of the founding of the People's Republic of China.

Lin said that out of 53 countries currently grappling with an aging workforce, 27 had a GDP per capita at least half that of the U.S. when they entered this phase, while the GDPs per capita of the other 26 remain lower than 50 percent of the U.S.—in other words, they are "getting old before getting rich."

The economies in the second group have experienced more growth despite the demographic drag, Lin said, as their workforces make up for lost ground on the education front. This has led to higher productivity and innovation to offset the declining number of people of working age, he said.

An 80-year-old can't walk as fast as a 30-year-old

"Physiological laws affect economic laws. Lin Yifu does not understand the laws of physiology, and his argument that China's economy has a growth potential of 8 percent is like arguing an 80-year-old man can walk as fast as a 30-year-old," Yi Fuxian wrote in a recent op-ed for Voice of America in response to Lin's upbeat forecast.

Yi pointed out that persons aged 65 and older already account for 15.4 percent of the population. No country with that high a proportion of elderly enjoyed 4 percent GDP growth over the next 12 years, he said.

"People are born, old, sick and die, and so it is with the economy. Aging changes people's physiology, psychology and behavior and affects production, consumption and innovation, thereby reducing economic vitality," he said.

The demographer added that younger generations drive consumption and raise economic confidence, so the share of young people is positively correlated with economic growth.

The early bird gets the economic growth

Yi also questioned the politician's view that belatedly joining the high-income club can be a net positive.

The labor forces of two of China's recently developed neighbors, South Korea and Taiwan, began to shrink in the mid-2010s.

Then, "the median age and proportion of 65+ year olds began to surpass that of the U.S. in 2010 and 2022, respectively," he said.

Taiwan's per capita GDP began stagnating after reaching 42 percent of the U.S.'s in 2010, and South Korea's per capita GDP dropped from 53 percent of the U.S.'s in 2018 to 41 percent last year.

Yi said China faces an uphill battle if it's to extricate itself from the middle-income trap, a term coined by economists Indermit Gill and Homi Kharas in 2007.

The country's per capita income stood at just over $12,500 by the end of 2023.

Assuming a "fortunate" GDP growth rate of 3 percent in 2028 and 1.5 percent in 2035, China's per capita income would not likely exceed $15,426 and $17,893, respectively, in current price terms, Yi said.

The U.S.'s per capita income, already estimated to be over $80,000, would also increase, making it even more difficult for China to catch up.

A "paradigm revolution?"

In addition to its demographic woes, China continues to face deflationary pressure related to its property market slump and overproduction amid decreased demand.

On top of that, Yi warned China's "industrial chain is shifting to the Belt and Road countries, which will lead to the decline of China's manufacturing industry. Meanwhile, trade barriers erected by the U.S. and other major economies will chip away at China's trade surplus.

The researcher also pointed to disposable income, which comprised about 44 percent of GDP per capita last year, according to China's statistics bureau. Even if the middle class sees its discretionary savings rise to the level of high-income countries, the middle class is still a minority in China, he said.

To move beyond the middle-income trap, China needs to tackle two main problems: raising disposable income and finding a solution to its demographic crisis.

But he warned this will require a "paradigm revolution" that is "much more difficult and resistant than the economic reforms of 1978" under former Chinese leader Deng Xiaoping.