Macroeconomic effects of demographic change: From the perspective of China's urbanisation

Conventional views hold that low fertility will lead to low economic growth in the future. We examine the case of China, which has experienced decades‐long below‐replacement fertility, resulting in a rapidly ageing population accompanied by unintended diminished labour force growth. Compensating for the decline in the working‐age population, strong internal migration from rural to urban areas continues to sustain a large, growing and productive urban workforce. To analyse these competing forces, this study employs a quasi‐structural model with several channels that are crucial to demographic‐macroeconomic relationships to assess the potential effects of demographic changes on economic growth in the long run. A long‐run relationship exists between the urban working‐age population, real capital stock and real GDP (rgdp). Although the total working‐age population is projected to shrink, it can be offset by the increased capital stock and continued internal migration to high‐productivity urban areas, so rgdp is projected to increase through 2050. Projected trends indicate that domestic savings will be sufficient to finance projected investment. China's continued emphasis on capital‐intensive production utilising a highly productive urban labour force plays a dynamic role in increasing output and sustaining economic growth for several decades despite persistent low fertility and population ageing.