Chinese Labor Pool Begins to Drain

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China's working-age population shrank in 2012, marking the beginning of a trend that will accelerate over the next two decades and have profound implications for the world's second-largest economy.

By the end of December China's population aged between 15 and 59 was 937.27 m, a decrease of 3.45m from 2011, according to figures released by China's National Bureau of Statistics on Friday. "In 2012 for the first time we saw a drop in the population of people of working age ... We should pay great attention to this fact," said Ma Jiantang, head of the National Bureau of Statistics.

"There are different opinions on whether this means that the demographic dividend that has driven growth in China for many years is now coming to an end," he added, noting that it was only the start of a long-term trend that would see steady decreases in the working age population each and every year between now and at least 2030.

Mr Ma described last year's drop as "worrying", even as the Chinese economy rebounded in the fourth quarter. China's gross domestic product grew 7.9 per cent year-on-year in the final three months, up from 7.4 per cent in the third quarter and breaking a streak of seven consecutive weaker quarters.

The surge boosted investor and business sentiment. "We definitely saw China strengthen again atthe end of the year," said Jeff Immelt, chief executive of General Electric,which reported a 17 per cent increase in fourth quarter pre-tax profits to $5.27 bn. "The big drivers of China continue to be healthcare and aviation. We believe China momentum is likely to continue into 2013."

Many analysts fear, however, that China's aging workforce could become a big drag on future growth.

As societies become richer, birth rates tend to decline naturally – but in China that trend has been deeply distorted by the country's controversial one-child policy introduced in the late 1970s. "Most projections . . . estimated that the decline in the working age population would start around the middle of this decade," said Frederic Neumann, co-head of economics at HSBC. "But [Friday'snumbers] show it has already happened, which suggests the decline over the next few decades will be faster than expected."

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The demographic dividend that has driven growth in China for many years is now coming to an end

While China's economic growth rate of 7.8 per cent for 2012 marked its slowest annual pace since 1999 and was well below the 9.3 per cent growth it managed in 2011, the country still created 2.84m jobs last year. Large numbers of people continue to move from the Chinese countryside to the cities to find work. Last year the urban population increased by 21m to reach 712m.

On Friday, Mr Ma suggested the government was satisfied with a lower headline growth rate after three decades of 10 per cent average annual growth, particularly since the slowdown was not accompanied by high unemployment. "China's economy cannot and indeed should not continue to grow at those very high rates," Mr Ma said.

He added that 7 to 8 per cent annual growth was an appropriate and reasonable level for China's stage of development. Despite lower growth, China's labor market remains tight in many places and companies often complain that it is difficult to find qualified workers, particularly in the labor-intensive manufacturing sector.

"Most countries begin to upgrade their economic model and raise productivity when faced with declining populations," said Vincent Chan, an economist at Credit Suisse. "Wage increases, more automation and production of better-quality products are all likely to become stronger structural trends in China."