China is a topic that splits many people.
Some believe that China is going be the world leader. Many forecast that the Chinese economy will overtake the United States in terms of GDP.
There is no doubt that China's growth story over the last 40 years was incredible. The country went from a second world nation to a global superpower.
In spite of this, there are some headwinds the nation is facing which could derail it. These could push cause economic devastation, tossing the country much further down on the scale.
We are going to jump in to see what pitfalls could exist for the world second most populous nation.
Image by Zan's World
Demographics
China was the most populated country in the world until just recently. It was surpassed by India this year and things are just getting started.
Many demographers claim that China is the fasting aging population we have seen. This is a situation that has a direct economic impact.
Japan found out what things look like when the population starts to shrink. Last year, China's population decline by over 800K people. This is a drop in the bucket compared to the 1.3 billion people. However, even this total might be erroneous.
There are reports that China overestimated its population by 100 million people. The problem is these people would have been during the One Child policy. This means the decline is in the child bearing age, compounding the problem.
Some forecasts have the population being cut in half by 2060 or 2070.
This has translated into economic difficulty. As people age, they require more social services while also seeing their productivity being reduced. The population inversion causes issues that no country has solved yet.
Low Cost Producer
For the last half century, China asserted itself by being the world's low cost producer. The manufacturing capacity of the country exploded, causing a major trade surplus with the rest of the world.
While this might look like a good thing on the surface, there is a major headwind brewing.
Historically, the low cost producer ends up in a major recession as a result.
In the late 1800s/early 1900s, this role was filled by the United States. Europe found it a lot cheaper to have manufacturing done overseas and imported. Sound familiar?
The problem is that, by the 1920s, things were starting to turn. As prices and wages increased in the US, the advantage it had was ending.
What followed the 1920s was the worst economic setback the country ever saw.
This was followed up, post World War II, by Japan. This country became known for its low costs in manufacturing. The Made in USA was replaced by Japan.
Of course, this party ended in the late 1980s and was followed up with 3 lost decades.
Is China destined to follow suit? While things could change, we have to be mindful of a few basic issues.
Countries like Vietnam are already throwing their hat into the ring, pulling some manufacturing away from China. This is the core issue: someone always enters with lower labor rates.
This problem is compounded by the technological era. There is little doubt that the future is one where products are going to be created closer to where they are consumed.
Low GDP Per Capita
China is a rather poor country. Even though their GDP is second in the world, the large population means that the average person is not very wealthy. In fact, the country ranks 70th globally.
Many have opined that China is going to get old before it get rich. This could well be the case.
The United States is the largest in the world. It is also roughly 70% consumption. China is the largest exporter. The transition to an economy based upon consumption is not an easy task.
This is compounded by the demographic issue. One way to increase production is with kids. China has one of the worst fertility rates in the world. This means all the economic productivity that would have been created to simply provide for children is not present.
What we have is the exact opposite situation. As people age, they reduce their consumption.
Thus, how is China going to maintain its economic might if it is not consuming on its own? Other countries are likely to enhance their production, if for not other reason because technology offers that.
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