China’s economy faces a slower growth future, as the long-standing drivers of its economic strength have peaked, and as challenges such as an aging population and weaker productivity are increasingly a drag on momentum, says Moody’s Investors Service.
Over the next three to seven years, China’s economic growth is expected to slow, as it faces structural challenges from demographic and productivity trends, the rating agency said in a new report.
On the demographic front, a combination of declining fertility and increased life expectancy will produce an aging population that will be a drag on growth.
Moody’s reported that the working-age population is forecast to decline to around 767 million by 2050, from 998 million in 2019, partly as a result of the one-child policy.
“At the same time, over-investment in infrastructure and property, high levels of debt and relatively slow progress in implementing economic reforms have also resulted in slowing productivity growth and decreasing capital efficiency over the past decade,” it said.
These challenges come as the economy’s previous drivers such as urbanization, capital investment and exports have peaked, the report noted.
“The surge in China’s urbanization to 65% in 2022 from 29% in 1995 opened up opportunities for capital investment in infrastructure and property construction, as well as a chance to boost labour productivity by improving the efficiency of rural migrants,” the report said. “But, as China’s urbanization is projected to reach the same level as advanced economies by 2035, the rate of growth will slow down, leading to a decrease in these opportunities.”
Export growth has also “become more uncertain,” Moody’s noted: as China’s low-cost advantage has been eroded, geopolitical tensions have risen, and Western economies have looked to secure their supply chains.
In response, China’s economic policy is evolving.
“The government has identified high-tech development, raising domestic consumption, increasing social security and continuing market-oriented reforms as areas of focus,” Moody’s said.
If China can successfully pivot to these other drivers, annual growth could average approximately 4.2% for the 2023–2030 period, the rating agency said.
However, if that shift to new growth drivers isn’t well executed, returning to traditional investment patterns, such as focusing on property and infrastructure, would be less effective than in the past, it said, because of the slowing in related trends, such as urbanization.
And a return to traditional investment could divert resources from more dynamic and productive sectors, it said.
In that downside scenario, Moody’s sees average annual growth slowing further to 3.5% for the 2023 to 2030 period.
In this environment, credit quality would likely decline too amid weaker sovereign credit metrics and declining government supports, along with sector-specific factors, the report said.
In particular, financials, technology hardware and infrastructure-related industries “could experience a negative credit effect,” it said.