You’d do it if you loved CCP ….
The demographic decline is way old news. Some of us were writing about it ten years ago. But the implications are still fuzzy to me. Spoiler – key to the future is consumer spending. Consumer spending depends on there being (1) enough people with (2) enough disposable income. Therein lies the complex Chinese tale.
Michael Pettis has written for years about the implications of excessive debt in China. Good examples are China's Overextended Real Estate Sector is a Systemic Problem and How China Trapped Itself. But now the demographic changes will start to affect the micro and macro economy. Pettis is one of the few who can write reasonably about this topic, but to my knowledge he hasn’t addressed it. Daniel Rosen has an excellent beginning in his Foreign Affairs article The Age of Slow Growth in China.
Yi Fuxian, a senior scientist at the University of Wisconsin-Madison has written on some of these topics. An example is https://www.project-syndicate.org/commentary/china-population-decline-will-mean-economic-geopolitical-decline-by-yi-fuxian-2023-02 and https://www.project-syndicate.org/commentary/china-population-aging-lowering-economic-growth-by-yi-fuxian-2023-04 A hat tip to the ChinaCharts guys for the citation.
I've long been waiting for some serious analysis of demographic change, requirements for pension and health care spending as people retire, and contributions to the social welfare funds. Smaller population means fewer babies (starting about ten years ago) so in ten years fewer people paying into the welfare funds. People aren't dying faster, so the age bulge is woefully out of favor for China. The working age population is decreasing about 5 or 6 million per year right now, but I don’t know how many of those are retirees and how many are young people who aren’t there. The demographic impacts on government revenues and spending are of critical importance.
China had something of a baby boom post-famine, let us say from 1962 to 1978, when the one-child policy went into effect. Most of those kids had siblings, but the boomlet lasted less than twenty years. And few of them had more than one child. Now that boomlet cohort is aging, and they get older every year. They are starting to retire now. The US had a demographic dividend from the baby boom generation – those born, let us say, 1945 to 1965. The difference with China is that boomers generally had more than one child of their own, so the boom created at least one minor boomlet from, let us say, 1965 to 1990. The dividend in the US lasted much longer and did not result in a later collapse of births.
Let’s summarize – China’s “pig in the python” demographic model was a great dividend for Chinese GDP, but is now becoming a great burden, a result of the one-child policy. The current “two or three child” policy is a complete bust. Total fertility rates have been below replacement since about 1990, are unlikely to reverse, and foretell with some certainty the demographic conditions six or eight decades ahead. The severe population decline is baked in, regardless of how much stimulus Xi wants to give to the economy or to Chinese men.
So now what? There are a bunch of questions –
My contention is the world is saturated with Chinese goods. There just can’t be great future increases in demand for Chinese-made phones, clothes, cars, tvs or washing machines. Replacements, of course. Development in Africa will arrive too late to help. If anything, Xi has managed to create a wellspring of BALAP – buy as little as possible – from China. Or maybe BANC – buy absolutely nothing from China. Regardless of acronyms, Chinese exports are unlikely to grow much in the next decade.
The infrastructure age is over – has been for more at least fifteen years. Economists see the extraordinary waste in more rail lines, more airports, more expressways, more ports. The real demand has long been met. Current debt problems for local governments are a result of a CCP edifice complex and an attitude of “if you build it they will come.” That worked in baseball. Not so much for people to ride trains. The point is that government no longer gets growth from more construction. It only gets more debt and short-term jobs. It is pushing on a string. Related, demand for steel and concrete will remain steady or fall. OBOR projects helped support Chinese construction exports and jobs, but even that era is mostly over. CCP is learning it will have to reduce interest rates and extend maturities on lots of OBOR loans.
With steady or only slowing increasing exports, there will not be much new demand for farmers to move to cities to work in factories or do construction. Of course these industries will not disappear, and farmers who get tired, hurt or old will be replaced. But new demand for apartments will slow dramatically even with hukou changes.
Real estate and its related purchases – beds and washing machines and air conditioners – currently constitute about 25% of total GDP investment, which itself is still about 40% of total GDP, far too high a percentage for a developed economy. Given falling population demand for new apartments and the severe crackdown on the real estate industry, these percentages must fall, with nothing to replace it.
Related, sale of land for real estate development became a major source of revenue for local governments in the last fifteen years. In some cities – Hangzhou is reported to be one of those – real estate revenues account for more than 50% of total revenues. The problem is severe enough that a major restructuring of central-local finances is in order. But in the meantime, local governments are cutting staff and cutting wages even for long term employees.
Real estate in the form of one or two or five apartments constitutes about 80% of family wealth. Extra apartments are usually not finished inside and are left vacant – they produce no income. What impact on family finances when the +/-65 million empty apartments cannot be sold for a high profit … or maybe sold at any profit at all? (NB – 65 million is about the population of Germany).
Pension systems have long been a source of corruption and mismanagement. Systems are being rationalized, but the demographic pig is going to swamp systems nationally. There will be a lot less money coming in than going out. (Think big American companies that had generous pension schemes dating from the 1950s and then people began living longer and at the same time the companies began streamlining the workforce ...) This will require a large central government fix, as already happened years ago in Liaoning Province.
The reason why GDP could grow so fast in China is that metaphorically, it took a farmer picking rice and overnight put him in a factory where he was immediately more productive. Some training was required, but not too much. Training now is much better, but a lot of those unskilled factory jobs are disappearing. Fewer workers means fewer workers per job. That could be ok if rural schools can step up to train replacements for the urban retirees. But I'm not so sure, even with increased attention to rural schools. The generations still on the farm didn't want to/couldn't make it in the factory. (See Scott Rozelle’s Invisible China). What impact on wage scales?
Of course, what prospects for American companies selling at retail in China but with fewer people to buy or manufacturing in China as wages continue to go up and international pressures fester.
Nothing said so far here about pollution, water availability and quality and energy generation. These are each enormous problems of their own. Nothing said here about promoting conflicts with neighbors, including Taiwan and Japan and Philippines and Vietnam and India.
Its pretty easy to point with alarm and ruminate over the impossibilities of the future. I used to worry about tea leaf harvesting on steep hillsides. That work is done by hand, tea leaf by tea leaf. You can’t run a big John Deere harvester through the tea bushes on the steep hillsides. As peasant incomes and opportunities increase in China, who is going to pick tea leaves in the enormous quantities needed? Then I discovered the hand-held trimmer, like a gigantic hair trimmer, that trims and blows leaves into a long plastic bag (one model of many https://www.alibaba.com/product-detail/139F-4-Stroke-Tea-Leaf-Harvesting_62043574397.html?spm=a2700.details.0.0.6e9239ddM3K92l , $330 for one). I can’t vouch for functionality, but perhaps I should just trust my engineering background and let the tea leaves fall where they may. Perhaps I should just trust in CCP to lead.
Yet unease remains. Years ago, a few economists – Barry Eichengreen for one - and demographers wrote about China getting stuck in the middle-income trap and getting old before it gets rich. The middle income trap reminds us that economic systems spawn tough organizational political supporters that don’t want to give up power. That now seems more likely, regardless of what Xi promises re: common prosperity and a "moderately prosperous society.
Yi Fuxian produced articles like Leaked Data Show China's Population is Shrinking Fast from which the ChinaCharts guys derived a future disposable income figure. The concept in the figure below is to show a chart using data similar to that provided by BLS for the US, although China does not provide such data.
From ChinaCharts https://substack.com/profile/51042600-china-charts
Neither the derivation nor the assumptions are provided. One can see where they are going, but I'm not sure how they got there. What they are trying to show is that younger Chinese have far less lifetime purchasing potential than their parents.
Their conclusions -
- The feasibility of consumption-led growth in China is gone. The ship has sailed, and the window has closed for any potential reforms. China’s demographics, even adjusted by lifetime earnings, are stepping off the cliff literally this year (2023). It’s an inflection point.
- To compensate for the demographic cliff, China would have to achieve sustained wage growth of ~9% year-on-year to maintain consumer earning and spending power levels.
- Historical data from Bloomberg shows the most recent print for median wage growth at ~4.7% and falling.
Their Remaining Lifetime Earnings by Age Group figure above seems unnecessarily vague but the conclusion – that significant growth in consumption may not be possible – seems right. That fits with the demographic changes, accompanied by a middle income trap, the necessary decline in GDP growth, the end of infrastructure, the end of great export growth, the need to address debt overhangs, the need for government to spend more on education, health, pensions and welfare, and a world that is less awed by CCP propaganda about hurting the feelings of the Chinese people. If this is such a great civilization, how come everyone is so fragile? And how come they don’t want to make more Chinese to be a part of it?
Notes –
Bureau of Labor Statistics – Consumer expenditures vary by age -
https://www.bls.gov/opub/btn/volume-4/consumer-expenditures-vary-by-age.htm
Barry Eichengreen on the middle income trap and China –
https://www.nber.org/papers/w18673 and
https://eml.berkeley.edu/~webfac/eichengreen/e191_sp12/econ191_conclusion_4-23-12.pdf
