These are the three big challenges for China’s economy
Domestic reforms that address China's main challenges would also help improve relations with the United States and other advanced economies.
The well-known story of China’s spectacular growth, at around 10 per cent annually for 40 years, is coming to an end because of both domestic and global factors. There are three particularly striking challenges to China’s economic prospects for the next several decades: the shift from a labour-surplus to a labour-scarce society; the shift from investment to innovation as the primary source of growth; and the shift in China’s global position from a rising power to an established power.
Rapid ageing is probably China’s biggest domestic challenge. The population over 65 will increase from 200 million today to 400 million by 2049, while the overall population will decline slightly. Within this group, the most rapid rise will be in the population 85 and older: from fewer than 50 million today to over 150 million in 2049. The challenge of taking care of the elderly is compounded by China’s rural-urban divides.
Most of the elderly live in the countryside, though often their working-age children have moved to cities as migrant workers. Since rural health systems are weaker than urban ones, taking care of the elderly will require more permanent migration to cities plus strengthened rural service delivery. China needs to scrap the hukou household registration system that limits permanent migration and to unify rural and urban pensions, health insurance and educational systems. This will be good both for social objectives and the efficient use of labour.
Dealing with ageing is first and foremost a quality-of-life issue, but it also has economic implications. China’s labour force will shrink, but by how much and with what impact remains to be seen. As China’s workforce shrinks, the 55–64 year-old cohort will increase dramatically. Keeping this group and the ‘young olds’ (65–85) healthy and active is China’s best hope for staving off a dramatic labour force decline. Improving rural education is also critical because about half the workers of the future are attending school in the countryside. Deficiencies in their education will affect China’s growth for years to come.
China is counting on robots and automation to fill the gaps in the labour force, but it is impossible to force automation to keep pace with declines in particular types of jobs. The social safety net and retraining programs will be increasingly important to help people keep up as the job picture shifts.
A second weakness that China needs to address is its over reliance on investment and underperformance on innovation. The financial system adequately channelled resources to investment during China’s rapid growth phase, but the state-dominated system is inefficient. Now that China has reached middle-income it will need to depend less on investment and more on innovation and productivity growth.