The role of demographics and migration for the future of economic growth in China

China's real GDP has been growing by almost 10 percent a year for the last three decades. For how long should we expect this spectacularly high growth to continue? We propose a quantitative two sector model with segmented labor markets and financial frictions to evaluate the prospects for China's future growth under different policy scenarios. In our model the high growth rate observed in China since the early 1990s is fueled by the large increase in urban labor supply, because of rural–urban migration, and the emergence of private enterprises that absorb those migrant workers. Our simulations suggest that the rapid aging of its population and the decrease of rural migration should significantly decelerate urban labor force and economic growth starting around 2020. Through a counterfactual with a fixed age distribution, we find that population aging is responsible for the deceleration of economic growth between 2020 and 2040. We show that substantial relaxation of labor market segmentation and financial constraints faced by private enterprises could improve efficiency substantially and delay this process of growth deceleration by one decade.