In recent decades, China has made a significant contribution to global growth. Thanks to the expansion of exports of manufactured goods to the world and the strong allocation of resources to investment in infrastructure and housing, the country became responsible for about 20% of global GDP and reached the position of the second largest economy in the world.
Over this period, the role of gross fixed capital formation in this outcome has been greater than that of consumption, but recent changes in China’s demographic structure, coupled with the reorganization of global production chains, suggest that the Chinese economy’s growth prospects are increasingly turning toward the future should domestic consumption.
The recent poor performance of the real estate sector reflects the impact of demographic changes highlighted in the 2020 census. Over the past decade, the population has grown much more slowly than expected and is expected to peak in the coming years.
The rate of urbanization was also surprising: 64% of the population lives in urban areas, compared to 50% in the last decade. As the population grows more slowly and becomes more urban, this means lower demand for space and new construction and a less dynamic real estate sector.
If, on the one hand, population growth and the development of urban areas should dictate a new configuration for civil construction, based much more on the renovation and remodeling of existing units than on the construction of new houses, on the other hand, the increase in education indicates likely productivity increases in the economy , which result from a more highly qualified workforce over time. Such productivity increases are essential to sustain the increasing aging of the population, which not only strains the pension system but also increases the costs of the healthcare system.
Between 2010 and 2020, the proportion of the population with a college degree increased from 9% to 15%. At the current rate of 9 million graduates per year, this percentage could exceed 20% next year and, by comparison, increasingly approach the American rate of 37%. The reason for this result is the expansion of access to university education, and this becomes even clearer when one considers the evolution of the educational achievements of younger people.
While there were only 950,000 graduates in 2000, less than 6% of the 17.5 million people born in 1978, about 10 million graduates are expected this year, representing almost 60% of the population born in 2001.
While this is good news for China’s human capital accumulation and potential growth gains, increased supply brings shortterm challenges to labor market performance.
A structural mismatch between the types of jobs available in the economy and the careers that young college graduates pursue results in significantly lower demand for the factory or construction jobs that were available to previous generations.
Much of the aspirations of young Chinese people today are in technology fields, but job creation in this sector has been significantly hampered by the regulations and restrictions imposed on companies in the sector.
Better employment prospects mean income gains for new generations and are an important pillar of economic growth focused on domestic consumption. As more people seek university education, necessary adjustments in the labor market are increasing the challenge of maintaining the living standards of millions of Chinese who have emerged from poverty during times of high economic growth.
The reorientation of China’s economic growth towards consumption is in line with the dual circulation strategy advocated by the government, which gives more weight to domestic consumption or internal circulation without sacrificing exports or external circulation, and should produce higher growth rates and bring more modest changes to the Chinese economy in the coming years during this transition. In this realignment, the reconfiguration of the housing, education and health sectors to promote socalled shared prosperity must adapt to China’s ongoing demographic changes.