Thursday, April 29, 2021

Has China's Existential Crisis Come Five Years Early?

Guess what? I'm not an economist! Nevertheless, I urge you to read Zerohedge's article on China's forthcoming census report. The short story is this: While everyone knew that within the next five years China's overall population--which is already rapidly aging--would actually begin to decline, it's being reported by the Financial Times that that process began last year. 

Population decline in a country attempting to overtake the US economically and as a major strategic competitor is a very big deal, because it exacerbates already existing structural weaknesses:

Deflation Threat Looms As China Suffers First Population Decline Since 1949

China is battling not one but three vicious demons. The interconnected issues of insurmountable debts, deflation, and demographics threaten to sap the world's future growth potential. 

Fending off the 3 D's: debts, deflation, and demographics requires the People's Bank of China to slash borrowing costs and unleash an enormous amount of credit into the local economy to cover up the faltering demand that usually persists with demographic challenges.

The question we should be asking is China really on the "rise," as President Xi Jinping believes ...

Many of us will remember the good old days of Japan Inc., back in the 80s, and that's exactly the parallel that analysts are drawing to the bind the Chinese find themselves in. As Japan Inc. discovered, battling two vicious demons--debt and deflation--is bad enough, but when demographic collapse is added into the equation everything gets worse. The problem for China is that, despite the perception of China as a modern economic powerhouse, it is actually nowhere near as advanced as was Japan. In particular, China has a vast poor and aging work force population--and no definite plans in place to provide for their old age.

In other words, China is caught in the classic "Wealth Trap"--it is growing old before it grows rich.  Worse, if the Financial Times is right, China just had five years taken away during which it hoped to prepare for a (hopefully) softer landing. The possibility of social unrest looms, as social pressures increase within China. This is happening at a time when China is facing many challenges and is showing an increasingly less congenial face to the rest of the world--and in particular to the Developed World. Did you ever wonder why wealthy Chinese are buying up real estate in the US and getting their children educated at our universities--hopefully with jobs in the US to follow--and why birth tourism to obtain a citizenship hook for the entire family is such a big deal? Wonder no more.

This is a major setback for Xi and the Communist Party elite:

Beijing desperately attempts to recover from its decades of disastrous 'one-child policy,' which officially ended in 2015 and was replaced by the current two-child policy.

According to FT's sources, the latest Chinese census data, which was completed in December and has yet to be publicly released (the issue is reportedly so sensitive that it won’t be released until many government agencies reach a consensus on the data and its consequences), is expected to show the country's first population decline since records began in 1949.

China's total population is expected to print less than 1.4 billion, according to people familiar with the census report, and if it is reported, the peak in China's population came five years earlier than the United Nations predicted.

The problem for China's rulers--one that they are well aware of, but too late--is that demographic trends are basically irreversible, certainly in anything remotely like the short term. Like Japan, beginning in the 80s, a still poor China is faced with the stark future of decades (at a minimum) of debt, deflation, and demographic decline. Worse, China will be burdened by a vast aging work force that it will be hard pressed to provide for, and a disillusioned and embittered cadre of young people who see little or no future. Even the prospects for marriage are dimming for many younger men, due to the Communist Party's insane past policies.

All of this also has implications for the world economy. China will remain a major fraction of the world economy, and a major supplier of manufactured goods--despite its problems. What may we or our children be faced with?

Firstly, demographics - if economic growth is a function of the number of workers and consumers in the economy and technological productivity, then a declining population in China would drag on the global economy. 

China's next path could be down the dark road of deflation, similar to Japan, where the typical response to deteriorating demographics is a continued build-up in private debt, leading to soaring public debt.

The main lesson from Japan is that high debt levels result in structurally weak growth and anemic inflation. This would suggest the latest spurt of inflation rippling through the world is not sustainable. Future growth rates in China are expected to be much lower than what was seen pre-COVID. 

Souring demographics would mean China's total social financing and M2 would need to increase to fill in the cracks of faltering demand as the population declines. According to Bloomberg's Ye Xie, a slowdown in credit growth could "start to shrink by July or August just as the Fed may lay the groundwork for its own tapering." This would signal deflation is ahead. 

Add social unrest into the mix, stir well, and see what happens.

The question for the US is, are we immune from similar pressures? Can we increase debt forever without falling into a deflationary trap? Will importing the poor of the world resolve our own demographic trends?


  1. Maybe their plan to save China involves expansion? through force? Been a large reason to start wars in history...just sayin...

    1. Yeah, war is a useful way to deploy an excess of young males.
      Another useful outlet would be, for the regime to direct their ire at the excess of, in this case, oldsters.
      Commie regimes, e.g. in the Stalin and Mao eras, have a history of being good at both approaches.
      I'll guess that today's ChiCom brass aren't sweating very much.

  2. I'm not sure I agree with ZH's take on this...

    You can't compare China to Japan where population comes into play as a means of panning out economic decline. It ignores that China has had the opposite issue of over population that they've been trying to address for a few decades now. (One child policy, etc) In China's case a lower population would be of a benefit overall to them.

    Russian is example more parallels Japan in this sense. Where their population has spiraled so low from stagnation after the collapse of the USSR that there's been serious debate if they will every manage recovery. I've seen opinions take it so far they pan the idea of Russia further dissolving.

    The US and china have different economies, china is a country that largely produces goods, the US is largely just a consumer of goods that's barely floating on a service and consumption base. If you remember that was one of Trumps major economic pushes, to get us back to production. Thus far Ziden and Heels Up are pushing us back to consumption.

    Sewing the seeds of economic dependencies on Government and banking control is just that... Dependent control. However, you can only manage that for so long.

    Interestingly enough the more consumers you can bring into play the longer you can drag that out, that's part of the tie in to our immigration policies. The more mouths need fed the better and the cheaper the labor the better. Never mind the new low lower class, they still have an average of 2.3 flat screens per household and cell phones.

    Big picture, I think they (the world of banking and economics) largely rely on the same ideas of nuclear treaty, *mutually assured destruction*. It doesn't matter if we tank because everyone else will tank as well. In the end, we all suffer the same fate.

    1. You forget that most of China's population is still "down on the farm." The CCP could kill off tens of billions and still be faced with the problem: How to feed it's population and how to pay for it without cutting other things.

    2. Slip of the fingers. Not "billions," but certainly several hundred millions.

  3. Well, this isn't anything new, really. The history of the world can be read as the rise, stagnation, and decline of nations, particularly in relation to rivals. The wider question then isn't so much whether China is in decline per se but whether the US is declining faster. In other words, who will crash first? Given the POS-OTUS and his merry henchmen intentionally crashing us, I wouldn't bet on China beating us to the bottom, especially when they have the viciousness to delay population and economic problems by conquest.

  4. The flaw in all that is a common misunderstanding of demography and economics alike. The demographic transition is nothing special to China, or any other country. In fact it is inevitable for all mankind.

    It is not disputed among experts that world population will peak in a decade or two at latest, and that it is good so if not damn late already. It will be hard work to keep the planet sustainable for 10 billion people. And as the increase happened in large waves ("baby booms") with under 15yo share of 45% and more especially in developing countries, there will be a natural buildup of aged populace, followed by decline, leveling out in waves over a centure if birth rates reach a stable 2 per couple which seems to be a trend once females get better educated and standard of living improves.

    For China, the decrease won't hinder growth. Urbanization will peak in a decade at earliest, being a considerable motor of growth and innovation even if "only" 8-10 million new children are born every year, and the baby boomers of the Mao age die.

    Further increase of life expectation will lead to a raising of retirement age which is already planned (recently, women in SOE retire at 50, men at 60).

    A shrinking workforce will be an incentive to raise productivity further, rather there may be less employment due to automation in the future, an incentive to reduce worktime which is fairly high both per week (saturday work normal, sometimes even sunday) and in yearly work hours (only about 2.5 weeks of paid leave, around Chinese new year, May 1, and National Day).

    Generally, China seems to plan ahead quite reasonably, so the fears or hopes for a China crash seem to be exaggerated to me.