The current phase generated carrier (PGC) demodulation system based on light source internal modulation method has phase noises of environmental and light source introduced by the interferometer arms difference and the high speed light source tuning. Aiming at this, a new PGC demodulation system based on microfiber all-optical phase modulator is studied. To satisfy the PGC demodulation requirements, the microfiber all-optical phase modulator based on light absorbing thermal effect is designed with bandwidth exceeding 10 kHz. Based on this, the PGC demodulation system of fiber hydrophone is constructed, and used to study the detection and demodulation performance of underwater acoustic signal. Experimental results show that the proposed system can realize good demodulation performance for the underwater signal with frequency below 3 kHz.