The last 40 years saw one of the most incredible economic stories in history. China went from, at best, a second world nation to the second largest economy in the world. It is a country that didn't have natural resources such as gold or oil, yet still managed to surge ahead.
What China had was people, and a lot of them. They were the populous nation on the planet for a long time. That situation might be coming to an end.
Demographics in economics is something that cannot be overlooked. There are examples around the world of where things are getting really tough. For example, Japan is mired in a 25 years deflationary spiral due, in large part, to their demographic situation. We now see Germany, Italy, and Spain in the same situation.
It is important to remember that Japan was, 30 years ago, being touted as the next superpower, the one that could rival the United States. They had a double digit percentage of the world's exports. They were buying up real estate all over the world. Many felt the Japanese economy would pass the United States.
Any of this sound familiar? It is identical to the situation with China today.
So what happened?
Japan's population becomes inverted. Instead of having a demographic makeup of lots of younger, working age people and few much smaller amount of seniors, the young people got old. They found themselves in a situation whereby the older people starting to outnumber the younger ones.
Forecasts are this is exactly where China is heading. The second largest in the economy in the world, predicted by many to surpass the U.S by the early 2030s, is facing some headwnds.
It is something that the Chinese government is starting to publicly address.
According to Reuters, China's population is dropping for the first time since 1949. The numbers are not being officially released, a delay that has some baffled. Is the government trying to keep the situation under wraps?
"If China confirms such a decline, it would be a big deal," said Zhiwei Zhang, the Shenzhen-based chief economist at Pinpoint Asset Management.
"The consensus expects China's population to peak at 2027, based on the projection made by the United Nations. This would be much earlier than the market and policy makers expected."
China long has the one child policy, something that was scrapped in 2016. The Chinese government puts the fertility rate at 1.6 but some who analyzed the situation put it closer to 1.18. It would make sense since the policy was only changed to 2 births 5 years ago.
"Our projections using the pre-census figures already suggested that the workforce would be declining by 0.5% each year by 2030, with a similar impact on GDP," Capital Economics wrote in a note on Wednesday.
The economic hit, globally, could be massive. It is important to remember that much of the global growth the past few decades was fueled by China. The rest of the world suffers from anemic growth. Japan, the U.S., and EU are mired in low growth periods, something that has occurred since the Great Recession.
China was already seeing its growth rate slow considerably. Something that was once double digits was half of that pre-COVID. The demographic situation will only make things tougher.
There are only a few ways GDP can be generated:
- Consumption
- Investment: money spent that is not consumption
- Government
- Exports
The last one is where China excelled for decades. However, that slowed as labor costs rose and countries such as Vietnam and Laos started to step in. We also can see technology hurting China since it is automating operations, something companies can do at home and save on the shipping costs.
An aging population does not invest in general but, for the Chinese, it is even worse. They only operate with a few investment choices and the one that is opted for is real estate. This is fine except it doesn't generate a great deal of innovation.
Government we know is a terrible ROI meaning that consumption is the only choice. Of course, this is something we heard, that China is trying to become a consumption economy like the United States. The problem with this is that aging populations are not spenders. They end up taking more of the government benefits in terms of social services. This means that the smaller, productive class is stuck trying to cover the costs.
It is a situation similar to Japan, just with much bigger numbers.
There is one possible bright spot in all this. We are in a much different age in terms of technology compared to when Japan started its slide. Things are much different compared to 25 years ago.
China could keep its productivity up, thus paying for what it needs, through technological advancement. It is something Japan is trying to get itself out of its multi-decade spiral.
Of course, the biggest challenge with this is that technology is extremely deflationary, not a good situation for a country that is loading up on debt. The reversal of the wage inflation due to automation (or other factors) could cause the debt to get more expensive.
Losing half a percent in GDP simply due to demographics is tough for any economy. It is far worse for a country that is accustomed to double digit growth for the last few decades.
If this situation does occur, what is the economic impact upon the rest of the world?
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