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China’s population ageing will lead to a very low potential growth, weak productive investment, a decline in external assets and, therefore, in the capacity to invest abroad and a sharp rise in per capita debt. Economists at Natixis describe this situation as one of decline for China, as it will no longer be a dynamic, growing economy.

Key quotes

“Given trend productivity gains and forecast growth in the working-age population, China’s potential growth will fall from 8% per year in the 2010s to 2.5-3% per year in the 2020s while the United States’ potential growth will rise from 1.8% per year in the 2010s to 2.0% per year in the 2020s. So China’s growth will become similar to that of the US.”

“Due to the return to more regional and less global value chains, productive investment in a given country (region) will increasingly depend on expectations for demand growth in that region. Given China’s low future potential growth, the incentive to invest in China will, therefore, become weak, which suggests that its productive investment rate will fall, amplifying the fall in potential growth.”

“Population ageing can be expected to lead to a fall in China’s national savings rate and, therefore, to the transition from external surpluses to external deficits. This will result in a reduction in China’s external assets, in particular its foreign-exchange reserves, which will reduce China’s capacity to invest abroad and therefore its international role. Unlike the US, China will not be able to use the international reserve currency role of its currency to borrow from the rest of the world and make investments abroad, since the renminbi plays only a very small international reserve currency role.”

“China’s total debt is extremely high; debt is used to boost activity each time growth slows. The coming decline in the population and, in particular, in the labour force, will, therefore, lead to a sharp rise in per capita debt, which will absorb savings to the detriment of productive investment. It will also contribute to lower potential growth.”