How boost to silver economy can bolster consumption

China's demographic development has entered a "new normal" of negative population growth and moderate population aging. Starting from 2022, the country's population growth started to enter negative growth territory, which will become a norm in quite a long time. At the same time, people aged 65 and above account for more than 14 percent of China's population, which means the country has started to become a moderate-level aging society, or perhaps, an aging society outright.

According to United Nations data, by 2034, the proportion of the Chinese people aged 65 and above will reach 21 percent. It means that China will become a highly aging society. This demographic would have huge human resources and also represent a huge market.

In the era of aging, economic growth will encounter some new challenges. On the one hand, the structure of the three major pillars driving economic growth — investment, consumption and exports — will change, with the role of exports and investment likely to be gradually replaced by consumption. On the other hand, aging itself will have some impact on expansion of consumption.

Since 2012, China's economic growth rate has trended down to drop below 8 percent. At the same time, the composition of its three major growth drivers has also changed, with the contribution of investment and exports to economic growth declining, while the role of consumption, especially household consumption, increased significantly.

Before the COVID-19 pandemic, the contribution rate of household consumption had reached a relatively high level. According to World Bank data, the proportion of urban and rural household consumption expenditures in GDP has significantly changed. After the pandemic, which greatly affected the economy, the development trends of consumption in the future will depend on how the country's macroeconomic policies can raise the consumption rate.

Population vs consumption

Demographic changes affect the population pyramid, or age structure diagram, and population aging changes the shape of the population pyramid. In the 20 years since the fifth, sixth, and seventh national censuses, China's population has gradually moved to converge toward the top of the pyramid, and the total size and proportion of seniors have both been increasing. But at the same time, consumption of older people does not account for a dominant share of the overall consumption.

The proportion of the elderly far exceeds their consumption proportion, because they no longer have labor-based income and the pension program is yet to be sufficient enough, leading to their declining consumption ability and willingness.

In rural areas, it is worse, as the consumption ability and willingness of rural households are even lower. According to results of the 7th national census, only 10 percent of the rural elderly have pension as their main source of livelihoods. Most of them continue to work or rely on support from other family members to provide for their livelihoods.

Reform dividends

To solve those problems, China must first innovate theoretical paradigms and change policy models. In terms of macroeconomic policymaking, the focus should be shifted from investors and enterprises to households, and more targeted policy tools should be explored. It should also ensure that household consumption can play a fundamental role in the development pattern to create a new balance among the three growth-driving forces.

Moreover, a welfare system covering the entire life cycle of all people should be built to promote social mobility and release reproductive potential. And policy adjustments, institutional reforms and system build-up should all rely on reform, and to that end, reform should be included in our normal macroeconomic policy toolbox.

Second, efforts should be made to relieve worries of migrant workers so that they can be more willing to spend more. There are now more than 170 million migrant workers in urban areas, but they do not have household registration in the cities. If all of them have urban household registration, then they will become more willing to increase consumption, creating an estimated extra consumption worth 1.2 trillion yuan ($166.2 billion). It would be a huge policy bonus.

Household registration itself is also a major institutional obstacle that prevents migrant workers from accessing high-quality employment. Their consumption could be further increased by breaking that barrier.

Aging rate

China's aging rate, or proportion of the population aged 65 or above, is at least 5 percentage points higher than the world average; at the same time, its household consumption rate, or the proportion of household consumption expenditures in GDP, is 18 percentage points lower than the global average. While the country's per capita GDP is already higher than the world average, Chinese households have lagged behind compared with the world average. Therefore, it is necessary to not only increase per capita GDP and per capita disposable income, but also make structural adjustments to increase consumption.

The silver economy in China is a sunrise industry. It is not a makeshift measure but a long-term solution. The 300 million elderly, as the main body for meeting market demand, will be an important driving force for the country's dual-circulation development pattern.

The writer is chief expert of the National High-end Think Tank, which is part of the Chinese Academy of Social Sciences in Beijing. This article is a translation of excerpts of his op-ed piece published on the official WeChat account of the China Macroeconomy Forum, a think tank.

The views don't necessarily reflect those of China Daily.