Is China About To Enter An Economic Tailspin?

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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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China is a place that I don't quite understand, but I think that if a nation that is booming like that suddenly finds itself stagnating in terms of economic growth, the value must move elsewhere. Global demand for products is still just as high, if not increasing. I wonder where the next booming economy will pop up.

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Demographics would say that the continent of Africa is a good candidate. India also could see a great deal of growth.

Manufacturing is likely to spread out over the next couple decades as technology brings it closer to home.

China wont collapse overnight by any means. Demographics dont work like that. It takes time for the shift to occur.

But they do have a productive class that is moving into retirement age over the next two decades. Looking at the younger generation moving into their most productive years (40-60), they just arent there.

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Based on demographics, Africa, yes. China is pouring money - and people - into this continent. Demographics are not everything, though. Education, skills and rampant corruption are variables you can't escape. I would be more inclined to India, primarily for those reasons.

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Thought your comment was so constructive that I have followed you :-)

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(Edited)

Thank you. Be warned, though, my posts rarely deal with this kind of topic. I reserve those thought processes to comments. You will, however find the odd long, ruminative post among the drivel.

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I really enjoy your writing style, so you could write "how to watch paint dry" it would be a good read 😀

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You are very kind! The nicest thing anyone's said to me all day!

Be careful what you wish for....

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Humor for me is difficult to write so I admire those that do it well 😀

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Education, skills and rampant corruption are variables you can't escape.

China had similar problems 50 years ago to.

Hence I disagree. Those factors can be overcome. Demographics cannot. If there are no people, there are no people.

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I am not disagreeing, in essence. I'm not arguing about the absence of people - that is a conundrum. But those three systemic issues are variables that impact everything. Especially economic growth and development. Having been embedded in an education system, it takes generations and, more importantly, will, and resources to change and build. I was in at the beginning of the "new" South Africa and helping to design some of the systems. We've seen no change. On the contrary, some things are worse than they were 27 years ago. Complicated by an ageing leadership and an angry, hungry, burgeoning youth with nothing to do.

The state capture commission currently underway is unearthing grand corruption at the highest and lowest levels. Huge populations of people with no skills and education, driven by avarice and self-interest = Zimabwe, Venezuela, Mozambique an South Africa's not far behind.

I would be delighted to be proven wrong.

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I see, I wonder if that can be avoided though by the government changing the focus of societal values. It has happened in the past...

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Bang, I did it again... I just rehived your post!
Week 54 of my contest just started...you can now check the winners of the previous week!
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China has always been a bit of a concern as far as a World PowerThey seem to be everywhere and buying into everything, unlike Japan China is a massive Country (physical size) Unfortunately I have never been to China and I have never really had a cultural exchange with a Chinese Citizen So I hesitate to comment. Even now The Banks in China are rumored to be considering allowing crypto currency when they were so dead set against it last year.

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The CCP should never have been allowed to get this big... we all empowered them-- dismissing the warnings with rosy projections of political change-- and if this news of their decline is true, it's nothing but good news. "China" itself doesn't much matter anymore though, as the Party has been slowly subverting and weakening its Western opponents over the last half century. We're training Chinese troops right now here in Canada. (Think bigger.)

Listen to the UN when they say things like "You will own nothing and be happy," and "The United States will no longer be the world's superpower." The wall on which the writing was written has already fallen down, and the fight reset is here. Look around you at most people... they will kill report you themselves if you get away from the herd-- if you even talk about it too loudly. (We're losing.)

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Well that is a typical defeatist view.

When has Marxism ever won out in the end? Do you see all those fleeing CA and NY to states like Florida and Texas? What are they running from?

And why is the Great Reset already failing in the US? Yes the media (propaganda) machine will toe the party line (of Schwab and others) but the fact is the US is now openly and emotionally divided. The states I just mentioned stood up to the lockdowns, stayed open for the most part, and weathered things economically.

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By the way, much was being said about Japan in the late 1980s here in the US. They were buying up property all over the world, expanding their "empire".

And it was like a switch was turned on one day and they ran back home. All of a suddenly defaults started to happen and Japanese companies started to have issues.

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Big, big differences between the two. People have tried to compare China's eventual democratization to places like Taiwan and South Korea too, but China is a much bigger and much less dependent politically. Florida, Texas and the other strongholds will be forced to secede and fight to stay free (which didn't work out very well for the South after the Civil War).

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The best thing China did is to use people effectively. This is the only thing made them a largest market in the world. Managing people is the most difficult thing but when someone learns this art, they rule the world.

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If this situation does occur, what is the economic impact upon the rest of the world?

The prices for labor will start to increase across all the Asian nations. There will probably be less cheap products being moved around and I think this will probably mean the other nations will take up the share. But this 0.5% GDP from China would be far greater than 0.5% for the other 3rd world countries. So prices go up and less people buy in as profit margins drop (or prices go up).

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Why would labor costs go up. They were happening in China over the past decade plus and that benefitted Laos and Vietnam. There is still an entire continent of Africa that is in that situation as well as most of Central America.

And the cost of labor going up in a world moving towards automation?

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Well I would think that they would rely on less competition in the labor market so higher prices. But yea automation might just remove those jobs altogether and prices drop.

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It was an odd policy to destroy one's own country by not replacing the work force. Not sure what they would anticipate would have happened reducing birthing rate to 1.

For growth everyone needs to have 3 kids for stagnation 2.1 for decline 1.

Their economic boom occured in the 80s 90s when capitalism came into full swing and manufacturing moved off shore. They had the numbers to fight over the wages to bring them down.

All Western nations are experiencing the same population stagnation. People are too time poor. Neo liberalism doesn't support family models or support growth (opinion) we need to go back to earlier models of Capitalism.

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...we need to go back to earlier models of Capitalism.

That isnt going to happen. That time is dead. We are no longer in the plant, raw materials, labor world. That is gone and the quicker people realize it, the better everyone will be.

It is why the battles for unionization and the policies by Sleepy Joe are just moronic. This isn't 1950. We are in a new era where an entirely new economic model is being constructed.

This will be far superior to capitalism and socialism although it will have parts of them in there.

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I think China will be left high and dry moving forwards :P

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Literally. 😁

Actually, that is a problem that will easily be overcome. New York faced a similar problem 40 years ago, albeit on a smaller scale.

Water is an easy solution, it is called desalinization. The challenge right now is that it requires a lot of energy which is still expensive for the cost per gallon.

That will change throughout this decade as energy costs plummet per kWh.

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The desalinization idea is covered in the video. In short, China uses a lot of coal to produce electricity and coal production requires a lot of water in the first place, so you can end up using more water than you produce :)

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Yes that is true and hence my point.

The water problem is not a water problem but one of energy. They use coal which sucks up more water than it ends up producing.

What if they used solar that had a conversion rate of 80%? Then no desalinization problem.

Of course, no 80% conversion rate on solar so that is the task at hand or some other form of cheaper energy.

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there is also the problem of size, solar and other renewables might be sufficient to power the desalinization efforts of a small country but you would need that implemented on a massive scale in China. And you would get diminishing returns the further from the cost you get

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China will be just fine, don't worry.

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They will be fine just like Japan is fine.

That country still has the third largest economy in the world. That does not mean there are not a lot of headwinds the country is facing.

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Both countries have totally different histories, cultures, and mindsets.
Looking through the USA (westerners) goggles not showing the real picture.
They know their stuff for millennia.
But I better not go there.

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This video mostly agrees with your post:

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(Edited)

He who controls the supply chain controls the world. I truly believe this. I think China has won already. The only thing that could possibly change the trend would be an unforeseen decoupling of economies of the West and China.

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A fair bit of the supply chain had moved to Vietnam and Laos over the last 10-15 years. Many of the Japanese companies started building there in lieu of/in addition to their Chinese operations.

Plus technology is going to bring a lot of production to a more local level.

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ADVChina & serpentza are some of the best sources you'll find about China. It's from 2 guys who've had tons of experience in the country documenting their authentic experiences. You won'tget the kind of insights from expert or MSM.

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You have to wonder how many people who might have had a family were like "if I can only have one kid, what is the point." I think that point is a really fine line. They were growing exponentially. I can't say I agree with the one child policy, but a small part of me understands why they did it. Interesting that it has come back to bite them at this point.

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Interesting that it has come back to bite them at this point.

It hasnt bit them yet nor will it for the next decade or so. Demographic issues tend to be slow to cause an impact. It is a slow bleed.

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This article is so informative I must say. I feel China is doing well with the kind of demographics. I wish Nigeria could take inspiration from China. It just makes sense as to why they are growing and developing because they are investing in the young generation...

Japan is a case of the disadvantages of demographic transition

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@taskmaster445Ole Great point of view, I found it interesting! China is going to be the new super power! China have been buying a lot of gold for the last 25-30 years, making them a robust economy for the future! I believe that they will be the winners in the next recession. Just have a look at how they handled the pandemic - covid19. They are going to handle a recession even better :) Thums up for China! Cheers

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