I will chime in following suit to Edward's discussion of China's prospects with some details from the US Census Bureau's analysis of China’s demographic future. Some excerpts are:
China’s population is projected to peak at slightly less than 1.4 billion in 2026, both earlier and at a lower level than previously projected…The latest projections indicate that by 2026, the population of China will begin to decline. Population growth in China, the world’s most populous country, is slowing and currently stands at 0.5 percent annually. China surpassed the 1.2 billion population mark in 1994 and reached 1.3 billion in 2006…The slowdown in China’s population growth is the result of declining fertility. China’s total fertility rate is estimated to have been 2.2 in 1990, 1.8 in 1995 and less than 1.6 since 2000. China’s fertility rate is currently half a birth below that of the United States, which is more than two births per woman.
Key evidence for the new fertility estimates comes from analysis of data from China’s recent census and surveys. One of the consequences to China’s declining fertility rate is that the number of new entrants to China’s labor force may be near its peak. The population ages 20-24 is projected to peak at 124 million in 2010…Despite a shrinking younger population, China’s labor force may continue to grow for several years since the population ages 20 to 59 (prime working ages) is not expected to peak until 2016 at 831 million, an increase of 24 million from the current estimated level.”
I highlighted several particularly notable statements. The concept that China’s labor force may peak in only six years at a level only 24 million persons greater than current should lead to careful reconsideration of several themes that have been conventional wisdom regarding China. These are the idea of the (practically) limitless labor pool, the idea that economic growth in China can continue to rapidly increase, and the idea that opportunities for market growth in China and outsourcing opportunities to China will increase for the foreseeable future.
If the size of China’s labor force is in fact near its peak then by definition domestic consumption will have to increase some time as those that leave the workforce due to age will be net consumers rather than savers. This could make China even more export-dependent, which is hard to imagine. Michael Pettis makes a solid case that domestic consumption in China has been shrinking in recent years as a share of GDP due to government economic policy.
A shrinking labor force will also make it difficult for China to maintain GDP growth rates. Michael Pettis in another analysis makes an interesting case that China may not be able to increase the productivity of its workforce as rapidly as many think. Since the textbook response to the problem of maintaining growth with a smaller workforce is to increase productivity, this could be a difficult problem. The burden of supporting the rapidly increasing population of non workers will last until the Chinese population as a whole starts to decline.