China’s Shrinking Population Is Deeper Problem Than Slow Growth for Its Economy

Beijing is now betting on a robust rebound in economic activities as officials increasingly signal that the recent wave of infections is reaching its peak. Some government advisers say the central leadership likely will announce a growth target of between 5% and 5.5% for 2023 at the coming legislative sessions in March. China on Tuesday posted 3% growth for 2022, its second-worst growth rate since 1976.

Speaking to the World Economic Forum in Davos, Mr. Xi’s top economic adviser, Vice Premier Liu He, sought to send a message to investors and executives that China’s growth would return to prepandemic levels this year as the country reopens.

On a Davos panel titled “China’s Next Chapter,” speakers also projected optimism. China’s reopening and exit from its zero-Covid policy is the “most positive catalyst” for global markets this year, said

Hong Kong Exchanges and Clearing Ltd.

’s Chief Executive

Nicolas Aguzin.

“If China produces a solid growth number for 2023, 5% or 5% plus, that will actually underpin much global growth for the year to come,” said

Kevin Rudd,

president and CEO of Asia Society.

China’s recent measures, however, won’t address a host of challenges, some of which were exacerbated by the pandemic. A rapidly aging population, slowing growth in productivity, high debt levels and rising social inequality will weigh on the country’s economic ascent for decades to come, economists said.

On Tuesday, the same day that China posted 3% growth, the second-worst growth rate since 1976, it also said that for the first time since 1961, its population shrank.

China’s population dropped by 850,000 to 1.412 billion. The shift toward a shrinking population, which came faster than Beijing had projected, marks a watershed moment in China’s history with profound implications for its economy and its status as the world’s factory floor.

The demographic milestone comes when, despite its enormous size, China’s economy is still that of a middle-income, developing country, as measured by average worker incomes when compared with the U.S. and other rich-country peers. China’s leaders have long held the ambition of leapfrogging the U.S. to become the world’s biggest economy, a task made harder by this strengthening demographic headwind, economists say.

“The likelihood of China someday overtaking the U.S. as No. 1 economy has just gone down a notch,” said Roland Rajah, lead economist at the Lowy Institute, a Sydney think tank.

The global economy has grown to rely on China’s vast pool of factory workers for manufactured goods, and its consumers represent a growing market for Western-made cars and luxury goods. A dwindling population means fewer consumers when China is under pressure to power growth through greater consumption instead of investment and exports.

Any rebound in consumption will also likely be constrained by a weak labor market and a housing downturn that has eroded the wealth of Chinese families. The jobless rate among people age 16 to 24 remained elevated at 16.7% in December, versus the peak of near 20% last summer. Growth in disposable income per capita could slow to around 4% each year in the next five years, downshifting from around 8% before the pandemic, according to David Wang, chief China economist at

Credit Suisse.

A smaller workforce will likely restrain economic growth. An economy can only grow by adding workers or producing more with the workers it has. China’s working-age population, which peaked around 2014, is expected to fall by 0.2% a year until 2030, according to S&P Global Ratings.

Productivity growth has been slowing. It slid to 1.3% on average in the 10 years through 2019, from 2.7% in the preceding decade, according to estimates from the Conference Board, a nonprofit research organization.

“It seems like it’s going to get old before it gets rich,” said Andrew Harris, deputy chief economist at Fathom Consulting in London.

There are some grounds for optimism, economists say. China could make better, more productive use of underemployed urban workers in state-owned enterprises as well as those still laboring in the countryside.

It is also adding automation and related technology to its factories rapidly, replacing or augmenting its shrinking pool of workers. Advances in robotics, artificial intelligence and other high-tech sectors that could turbocharge worker productivity “is the potential out for China,” Mr. Harris said, though he added whether it will succeed or not is unclear.

Meanwhile, China remains tied to its old playbook of fueling growth by encouraging governments and companies to borrow more to fund investments, a model that economists warn will be unsustainable in the long run.

The country’s overall debt as a share of its economy reached a high during the pandemic, as local governments borrowed to finance infrastructure projects and boost the economy. As of June 2022, credit to the nonfinancial sector reached $51.8 trillion, or 295% of gross domestic product, according to data from the Bank for International Settlements.

China’s policies throughout the pandemic have focused heavily on the supply-side rather than the demand-side of the economy. Unlike many countries in the West, the Chinese government refrained from handing out cash to households, directing most of its efforts toward supporting manufacturers.

“The systemic problems that China had in its economy before Covid are still there,” said

George Magnus,

an economist and research associate at Oxford University, “In some aspects, the pandemic made them worse.”

Despite the optimism expressed by some speakers in Davos, investors and corporate executives both inside and outside China remain wary of Beijing’s willingness to sufficiently roll back its restrictions on businesses of the past few years to re-embrace private capital.

Mr. Liu sought to allay those concerns during his Tuesday speech. He told the Davos crowd that a return to a planned economy, where the party-state dictates economic activities, is impossible.

But economists say Mr. Xi’s drive for self-sufficiency across a range of industries and his penchant for dictating how private business should be run will continue to sap vitality from the economy.

To achieve self-reliance in key sectors, Beijing has focused on channeling low-cost loans to favored sectors, such as semiconductors, renewable energy and pharmaceuticals. But the spending, which often involves less-productive state-owned enterprises, has also been plagued by waste and corruption, economists say, with limited evidence of real innovation.

“Xi’s desire to make sure that the Party’s control extends across society runs far deeper than his commitment to growing a market economy,” said Mark Williams, chief Asia economist at Capital Economics.

—Rebecca Feng contributed to this article.

Write to Stella Yifan Xie at stella.xie@wsj.com and Jason Douglas at jason.douglas@wsj.com