The drop, the worst since 1961, the last year of China's Great Famine, also lends weight to predictions that India will become the world's most populous nation this year.
China's population declined by roughly 850,000 to 1.41175 billion at the end of 2022, the country's National Bureau of Statistics says.
UN experts see China's population shrinking by 109 million by 2050, more than triple the decline of their previous forecast in 2019.
That's caused domestic demographers to lament that China will get old before it gets rich, slowing the economy as revenues drop and government debt increases due to soaring health and welfare costs.
"China's demographic and economic outlook is much bleaker than expected. China will have to adjust its social, economic, defense and foreign policies," demographer Yi Fuxian said.
He said the country's shrinking labour force and downturn in manufacturing heft would further exacerbate high prices and high inflation in the United States and Europe.
The national statistics bureau said people should not worry about the decline in population as "overall labour supply still exceeds demand".
China's birth rate last year was just 6.77 births per 1000 people, down from a rate of 7.52 births in 2021 and marking the lowest birth rate on record.
The death rate, the highest since 1974 during the Cultural Revolution, was 7.37 deaths per 1000 people, which compares with rate of 7.18 deaths in 2021.
Much of the demographic downturn is the result of China's one-child policy imposed between 1980 and 2015 as well as sky-high education costs that have put many Chinese off having more than one child or even having any at all.
China's stringent zero-COVID policies that were in place for three years have caused further damage to the country's demographic outlook, population experts have said.
Local governments have since 2021 rolled out measures to encourage people to have more babies, including tax deductions, longer maternity leave and housing subsidies.Â
President Xi Jinping also said in October the government would enact further supportive policies.
Measures so far, however, have done little to arrest the long-term trend.
