By Juan Carlos Conesa and Yan Wang
China’s real GDP has been growing by almost 10 percent a year for the last three decades. For how long should we expect this spectacularly high growth to continue? We evaluate in a quantitative two sector model with segmented labor markets and financial frictions the prospects for China’s future growth under different policy scenarios. In our model the high growth rate observed in China since the early 1990s is fueled by the large increase in urban labor supply, because of rural-urban migration, and the emergence of private enterprises that absorb those migrant workers. Our simulations suggest that the rapid aging of its population will significantly decelerate urban labor force and economic growth starting around 2040. In a counterfactual exercise we show that substantial relaxation of labor market segmentation and financial constraints faced by private enterprises cannot compensate for that deceleration.
Mainland China has a series of demographic time bombs waiting to explode: aging, sex imbalance, shrinking of population, many internal migrants with little rights. This paper addresses some of those. China is ahead of challenging times.