[SINGAPORE] As China confronts external geopolitical trade tensions, DBS economists have projected that the next 15 years will see the country weather structural problems from home.
While existing headwinds, including a rapidly escalating trade war and an ageing population, will weigh significantly on the country’s long-term growth, developments in artificial intelligence (AI) and automation may mitigate its growth slowdown, DBS said.
The lender’s team has forecast that China’s growth rate would slow to 2.5 per cent by 2040, with an average growth rate of 3 per cent a year from 2025 to 2040.
It used the Solow growth model, which determines gross domestic product as a function of capital investment, labour, productivity and human capital. That would mark a noticeable slowdown from the 4.6 per cent annual growth recorded from 2020 to 2024.
The team of economists, led by DBS chief China and Hong Kong economist Ji Mo, presented China’s outlook from 2025 to 2040 in a webinar on Apr 16.
Ageing population weighs on growth
Dr Ji said that China’s ageing demographic was an obstacle to growth.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
“China’s ageing population remains a structural drag on its long-term economic expansion,” she noted. “Ageing shrinks the workforce and raises dependency ratios, straining resources for innovation and growth.”
She added that its effects are felt across the economy, paring an annual 0.4 percentage point off growth projections.
Due to higher life expectancies, lower fertility rates and a declining total population, the report has forecast that the country’s working population will shrink by 0.8 per cent a year. By 2035, individuals aged 60 and above are set to rise above 400 million, or 30 per cent of the total population.
Neither does China’s ageing bode well for the country’s ongoing property struggles. While structural deleveraging of China’s property sector has become a policy priority for Beijing in the last five years, DBS expects that the country’s housing oversupply will continue to be exacerbated as household sizes, marriage rates and home-buying populations shrink.
China’s demographic struggles have not been ignored by policymakers. The country has begun progressively raising its retirement age – which currently ranks among the lowest globally – and recently announced its intention to use local government bond proceeds to convert unsold homes into affordable housing.
All in on AI
A broader move towards technology-driven productivity gains has been targeted by policymakers, as both a driver of productivity and to offset the country’s ageing woes.
The report noted that the country’s State Council has set 2025 as a major milestone for AI development, with a goal of becoming the global leader by 2030. State-backed venture capital funds have pumped more than 23 per cent of their total investments into more than a million AI firms nationwide in the past decade, the report said.
The emergence of DeepSeek, the DBS team said, is optimising chip performance, and lowering the energy and computational costs of AI model training and inference. The report further projected the country to dominate the global chip market by 2040, with its market share likely to rise beyond 50 per cent.
Such advancements in AI infrastructure is expected to enhance productivity significantly, the DBS economists added.
Humanoid robotics are intended to inject productivity gains across various sectors, especially healthcare, education, logistics and elderly care, with the adoption of robots projected to reach 50 per cent by 2040, the report said.
“The government sees humanoid robotics as a critical solution to the ageing population crisis,” noted Samuel Tse, senior economist at DBS.
Even agriculture is projected to undergo transformation, with the country targeting full automation in the sector by 2040 – early glimpses already seen in projects such as automated strawberry pickers in Shandong and soil-optimising drones.
Rethinking urbanisation
Yet as the country’s middle class continues to grow, Beijing has recognised the need to transition from capital to domestic consumption as the key driver of the economy.
Currently, high household savings of about 45 per cent of GDP – partly in response to insufficient social safety nets – has resulted in weak domestic consumption, which accounts for just 38 per cent of GDP, the report found.
“The government will roll out more and more policies to give people more confidence to spend. That means building a stronger social security system, so people don’t feel like they need to hold on to every yuan just in case something goes wrong,” said Nathan Chow, senior economist at DBS.
He projected that domestic consumption could rise to about 50 to 55 per cent by 2040.
Crucial to the target of sustainable domestic consumption is rethinking urbanisation, which has served as a key driver of Chinese economic growth over several decades through foreign investment and industrialisation, Chow added.
“To China, urbanisation is no longer about expanding as fast as possible – it’s about growing smarter,” he noted. “China wants to build cities that are not only bigger but better. We’re talking about more liveable, inclusive and sustainable places.”
The country’s urbanisation rate is expected to come in at least 75 per cent by 2040, said the report, with greater emphasis placed on healthcare, education and green infrastructure.
Technology remains critical in this approach to development. Chow expects such “smarter” urbanisation to integrate AI-powered optimisation strategies, such as Hangzhou’s pilot “City Brain” programme, designed to streamline traffic and energy grids.
Rural areas are already becoming integrated in e-commerce networks and digital agricultural supply chains through platforms such as Pinduoduo, the report noted.
Still, existing headwinds remain, as shown in the uncertainty towards trade relations with the United States, which threatens to escalate further.
“The impact of trade war will likely weigh on the disinflation of China,” the report said. “External demand will continue to slow in the medium term and exacerbate overcapacity.”
Paying attention to larger transformational and macroeconomic foundations in the country remains equally important, noted Taimur Baig, chief economist at DBS.
“China’s growth in the 2010s happened not because of its investments in the 2010s,” he said. “Instead, it was due to factors such as the country achieving universal literacy in the 1990s.”
“Today, seeds are being put in place that may provide fruits or create constraints 10 or 15 years out.”