China's demographic shift and economic challenges pose threat to West

China's economic numbers point to a slowdown in manufacturing for the fifth month in a row. This comes at the same time as one of the country's biggest homebuilders is on the brink of collapse.

It's the latest in a string of worsening economic news about the world's second-largest economy. China's economy is in deep distress, according to a recent Wall Street Journal report. Foreign investment is falling, trade figures are not rosy and the government has stopped publicising unemployment figures among youth.

All in all, it seems China's economy is tanking and this is not good news for everyone.

The economic model of vast borrowing and building projects worked when China was poor and needed new roads, bridges and airports, but it is no longer sustainable as the nation finds itself drowning in debt and with nothing left to build. Some of those new highways now stand empty, devoid of traffic.

In addition, China is facing a significant demographic hurdle that stands in the way of its long-term economic growth potential. With a population that is both declining and ageing, concerns arise regarding the future quality, purchasing capability and motivation of its workforce. Such demographic shifts could lead to diminished productivity, a decrease in capital returns and a potential erosion of national growth prospects.

Recent moves by major international investment banks reflect these concerns. These financial institutions have revised their growth projections for China in 2023, placing them beneath the central government's aspirational target of around five per cent. Several factors have been identified to justify these cuts, including soft consumption patterns, challenges in the property market and mounting debt concerns.

Data released on Tuesday highlighted these concerns, revealing a decline in China's services activity in August — the lowest in the past eight months. These figures have reignited concerns about the pace and stability of the economic recovery in the world's second-largest economy and its subsequent implications for global demand.

Bloomberg Economics' latest forecast offers a more extended timeline for China's ambition to eclipse the US as the global economic powerhouse. While earlier predictions suggested China might achieve this by the mid-2040s, Bloomberg's analysis suggests that even if this occurs, its margin of dominance would be diminished.

The repercussions of the stringent "zero-COVID" approach appear to linger among the Chinese consumer base, leading to a dip in consumer confidence. Analysts believe that a substantial economic stimulus might be required to rejuvenate the economy. And while it might take time for China's leadership to acknowledge this, the subsequent stimulus could have positive implications, not just for China but also for emerging markets, Japan, Europe and select sectors in the US.

An underlying issue in this scenario is the demographic distribution. Over 14 per cent of China's inhabitants are now aged 65 or older. This poses a significant challenge, especially in the aftermath of a global pandemic, with the economy striving to reclaim its previous buoyancy.

The evolving needs of the economy might be hard to match with the available workforce, primarily due to structural changes in various industries. This has reignited discussions around China's "hukou" household registration system, which has historically limited population mobility and inadvertently excluded rural migrants from availing of public services in urban centres. Analysts and observers believe a relaxation in this system might be imminent.

Despite these challenges, China's central leadership remains resolute in its mission to "restore and expand" consumption as a primary economic driver this year. However, the metrics concerning consumption since China's post-COVID-19 reopening (post three years of stringent controls including regional lockdowns) have unfortunately not echoed the same optimism.

On the flipside, in contrast to the prevalent thinking that China's economic downturn will negatively affect Western countries, some economists believe China's economic slowdown could help reduce inflation in Europe, while economic loss felt by EU companies due to reduced exports would likely be felt anyway as China pivots towards more self-reliance.

The slow pace of China's economy might be beneficial for the European Union (EU), according to some analysts who believe that China's struggles with its real estate bubble are causing a drop in the prices at which producers sell their goods. This could be good news for companies in the EU that buy products from China. Additionally, because China isn't as active in the real estate market as before, there might be a lower worldwide demand for materials like iron ore. This could lead to these materials becoming cheaper.

Such a drop in prices can assist the EU in combating the inflation issues it's been facing over the recent couple of years. A decrease in producer prices in China means that European businesses that import goods from China can get those goods cheaper. This is advantageous for these businesses as it can lead to increased profits or reduced prices for European consumers.

According to some experts, the EU has been facing an increase in inflation driven by supply issues over the past couple of years. Lower prices, resulting from the events in China, might actually help the EU counteract some of that inflation. If this occurs, it could benefit consumers and would actually be good news for many.

By Daniel Elliot

Daniel is a business consultant and analyst, with experience working for government organisations in the UK and US. On his free time, he regularly contributes to International Business Times UK.