Shrinking China Labour Force Has Global Impact

International | May 10 2021

China's labour force is shrinking and the consequences will be global, predicts ANZ Bank

-Decline in China’s population could lead to changes in global supply-demand dynamics
-Multinational corporations may look to realign global business portfolios
-Downsizing of China’s labour force intensifies technology competition with the US

By Danielle Austin

China’s long-term population trends may dictate future global supply-demand dynamics, according to ANZ Bank Chief Economist Raymond Yeung, who indicates changes in China’s available labour force would likely have a global impact.

Results from China’s forthcoming seventh population census are widely expected to report a population decrease for the fist time since 1949, despite the National Bureau of Statistics confirming positive population growth through 2020.

Notably, the demographic composition of China’s population may be more important than its physical size, with ANZ forecasting the country’s working age population will be below the global average by 2035, plus it will have a bigger share of elderly population than the US by 2045.

Although China continues to represent 22% of the global work force, the country’s population advantage peaked in 2011. ANZ points out its labour force shrunk back to levels similar to 2006 of around 771m throughout 2020.

Changes in China’s ability to provide a majority of the global workforce could have wide-reaching impacts. Notes Yeung, an aging population is likely to cause a decrease to China’s high national savings rate, a key driver of its economic expansion.

The country’s national savings have been pivotal to its ability to fund US fiscal debts, and may be an indicator that China and the US may be headed towards a financial decoupling.

Based on previous experiences of aging populations, ANZ predicts that as national savings decrease, interest rates may increase. Coupled with a smaller labour force, this may encourage multinational corporations to reconsider their location choices and to re-align global business portfolios.

Low yield domestic investment opportunities within China may also see Chinese investors seek higher-yielding investment opportunities in overseas markets and overseas yield chasing become a longer-term trend.

Historically, an aging population places pressure on life insurance companies and pension funds to seek overseas higher-yield investments, which could lead to significant changes in global financial flows as China’s elderly population outsizes that of the US.

Technology Becomes Divisive

The downsizing of China’s labour force may also intensify the technology race between China and the US, as the former seeks to mitigate labour shortage and maintain economic growth through technology and innovation.

The US plans to invest US$50bn in semiconductor manufacturing and research in a bid to out-compete China, notes ANZ, as well as developing technologies related to batteries, biotechnology, computer chips and clean energy.

The emergence of the US as a global leader in future technologies, particularly semiconductor production, presents a hurdle to China’s tech aspirations, and is likely to increase competitiveness, concludes ANZ.

Despite the census results not yet being released, the People’s Bank of China released a working paper on March 14 highlighting its concerns around population trends.

The report encouraged removing birth restrictions and promoting higher savings amid an ageing population, which has been viewed as controversial by local economists.

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