China's Great Leap Backward: So much for the next
dominant superpower
The Chinese century is over. Facing upside-down
demographic and economic trends, China is heading off the cliff
By Joe Tauke
The Salon, July 30, 2023
The "Chinese century" is over.
After all the prognostications, projections and
proclamations of the past 20 years asserting that China would soon overtake the
U.S. as the world's dominant superpower, the People's Republic is now facing
twin perpetual headwinds, and has no realistic options for countering either of
them.
The first could accurately be described as the
strongest long-term force driving the fates of all great powers: demographics.
What was, for many previous decades,China's ultimate advantage — its
never-ending supply of working-age laborers — peaked at almost exactly one
billion people in 2010, according to the Chinese census. The next census, in
2020, revealed that for the first time since China's economic liberalization in
the 1970s, the working-age
cohort had shrunk, decreasing by more than 30 million. The U.N. estimates
that this group will continue to contract, dropping to 773 million by 2050. (In
other words, between now and then China is likely to lose a number of workers
larger than the entire population of Brazil.) The under-14 population will also
fall in that same period, from just over 250 million in 2020 to a
median projection of 150 million in 2050. Not only will the workers be
disappearing, but nobody is expected to replace them.
(United Nations)
Every age-related trend in China is going in the wrong
direction. The nation's median age, once well below the Western world's, is now
older
than America's and headed further north with every passing year. Deaths
outnumbered births last year for the first time since 1961. The fertility
rate, which normally must be at 2.1 children per adult woman just to maintain a
steady population, has
slipped to below 1.1 — a figure made worse by the fact that, unlike in
virtually every other country on the planet, China doesn't have a relatively
even gender split in its adult population, the long-term
result of male favoritism combined with the central government's infamous
one-child policy. Basic math dictates that tens of millions of these
"extra" men will never start families of their own. To compound the
problem even further, women in China have indicated lower interest in having
children than ever before; more than two-thirds have expressed "low
birth desire." According to Prof. James Liang of Peking University,
fertility rates in Beijing and Shanghai have fallen to an astonishing 0.7,
"the
lowest in the world."
In Japan, economic stagnation produced a period that
was called the "Lost Decade." That stagnation eventually persisted so
long that some began to refer to it as the "Lost Generation." In
China, an even more ominous buzz-phrase has become popular online: The
"Last Generation."
Much has been made of the difficulties China will face
in attempting to manage a rapidly-shrinking workforce against a rapidly-growing
retirement age population, which is projected to double by 2050. But that issue
may actually be preferable to what is likely to happen afterward, or perhaps
sooner if some of China's older population doesn't wind up living as long as
expected. Here are the UN estimates for China's total population
between now and 2100:
(United Nations)
Notice the lower-end expectations at the end of the
century: 600 million, 500 million, perhaps as low as 450 million. Even
the median projection puts the number at around 750 million. This is
not just a rogue estimate by a single U.N. agency — the Shanghai Academy of
Social Sciences has issued an
extremely specific prediction of 587 million. If you think China has
ghost cities now, imagine that vast nation with barely one-third of the
population it has today. What will happen to property values in a country where
between 50 and 70 percent of its people have disappeared? What will happen to
tourism? To retail? So many articles have been written about what happens when
a modern society grows "too old," as has happened in Japan and
Germany, among others. But how many have been written about what happens when
the majority of a modern society vanishes altogether?
To make matters worse, if that seems possible, all
these numbers rely on official Chinese statistics, and the government has
likely been overstating them. According to an extensive examination of
different sets of books by University of Wisconsin Prof. Yi Fuxian, it's
possible to find the "fudging" effects by comparing
local and provincial data to that published at the national level.
If you think China has
ghost cities now, imagine that vast nation with barely one-third of the
population it has today. What will happen to property values in a country where
between 50 and 70 percent of its people have disappeared?
"For the official statisticians," Yi
explains, "the primary school enrolment data should be reliable because
public education covers every Chinese child. They were wrong, however, because
primary school enrolment data in China is often inflated so that local
authorities can claim more education subsidies from Beijing. … According to a
report by CCTV on January 7, 2012, the Jieshou city in Anhui province reported
51,586 primary school students, when the actual number was only 36,234,
allowing them to extract an additional 10.63 million yuan (about $1.54 million)
in state funding. On June 4, 2012, China Youth Daily reported that a
middle school in Yangxin county, Hubei province reported 3,000 students, while
the actual number was only 700."
In a country as large as China, what do these figures
look like when aggregated to a national scale? According to Yi,
government data "showed that China had 366 million new births"
between 1991 and 2010, "but the group aged 0-19 in the 2010 census was
only 321 million." In other words, either 45 million of those children had
died between birth and the census, or they never really existed in the first
place.
That was just one cohort, in one census, but it's
hardly the only example. "In 2010, the population aged 3-14 was only
169 million, according to the 2010 household registration database, and 176
million, according to the 2010 census," Yi continued. "Yet, according
to the Chinese statistics bureau, there were 210 million births in the
1996-2007 period." Again, either China has secretly experienced the
greatest wave of mass child deaths that the world has ever seen, or the
birth-rate numbers were always grossly exaggerated.
China's demographic headwinds, therefore, may be
hurricane-strength. To be fair, most major nations in the West also face
declining birth rates and aging citizens. The enormous difference in projected
demographics, at least in many of those cases, comes down to immigration. Even
with a current fertility rate of only 1.6, the U.S. population projects to
reach roughly 400 million by the end of the century, according to the U.N.'s
median estimate. East Asian countries tend to have much more restrictive
immigration policies, but nowhere is this as true as in the People's Republic.
Since 1950, which is as far back as the data goes, China has never
experienced a single year of net positive migration. Ever.
As previously mentioned, Beijing faces not one but two
enormous burdens going forward. The second should not come as much of a
surprise, as it was intertwined with China's population burst during all the
good years: the economy.
Yes, the mighty Chinese economy, the boomiest boom
that's ever boomed… is going to become a big, big problem. Much of this problem
will, of course, be caused by the enormity of the demographic crunch. But there
are specific details that will amplify the impact of that crunch. A whopping 70
percent of Chinese household wealth is held in real estate. Seventy.
Percent. (The comparable number in the U.S. is less
than half that.) The demand for investment properties has been so high that
China's construction eruption simply cannot be reasonably compared to those
that have occurred in any other major economy, even ones that have experienced
giant housing bubbles of their own. As this
graphic from the Reserve Bank of Australia shows, "residential gross
fixed capital" as a proportion of GDP is close to 20% in China — the
comparable proportions in Australia, Japan, South Korea and the U.S. are all
around 5% or less.
Keep in mind that China's population is shrinking, and
will continue to do so with increasing velocity. According to the World
Bank, home price-to-income ratios in Beijing, Shanghai, and Shenzhen exceed
"a multiple of 40;" the same figure is "only" 22 in London
and 12 in New York, two notoriously expensive cities in the West.
It is likely impossible to overemphasize the potential
economic damage that will likely ensue when previous decades of population
growth, urbanization and the frenzied real estate investment that has
accompanied them run into the brick wall of new decades with
consistently fewer buyers — and that doesn't mean "fewer
buyers" in the normal sense of a bubble popping, but the literal absence
of hundreds of millions of buyers over time. What will happen as those
aforementioned ghost cities begin to multiply? And perhaps the more important
question: How can China possibly make its all-important transition to a
consumer-based economy when consumers as a whole have shoved so much of their
wealth into properties that will often end up being worthless? How in the world
is this supposed to work? How could it work?
That consumer transition becomes more necessary every
day, because China has no other realistic option for productive growth moving
forward. For years, Beijing has obsessively pushed economic activity toward
investment, which sounds appealing at first simply because of the connotations
of the word. But the Middle Kingdom long ago started running up against the law
of diminishing returns when it comes to endlessly increasing investment. As
Carnegie's China scholar Michael Pettis explained
earlier this year, "China has the highest investment share of GDP in the
world. It also has among the fastest growing debt burdens in history. These are
not unrelated. With growing amounts of investment directed into projects whose
economic benefits are less than their economic costs, the surge in China's debt
burden is a direct consequence of this very high investment share."
Pettis is not strictly talking about central
government debt here, but rather total debt within the economy. Given the
prodigious real estate boom in the People's Republic, one could be forgiven for
assuming that's mainly what Pettis is describing, and such data surely factors
into the next two charts. But there are many other sectors that do as well.
Below is a graph of the increase in all outstanding non-financial corporate
debt in four nations — the U.S., France, Thailand and Malaysia — since the
global financial crisis. For simplicity's sake, the debt level in each country
was set to a value of 100 in the final quarter of 2007, and the data goes through
the final quarter of 2022:
(Federal Reserve)
That's admittedly not the easiest visual aid to
digest, so here's a summary: The total amount of such debt in the U.S.
increased over those 15 years to a level of 220, or slightly more than double
the amount that existed in 2007. Malaysia, which has posted the fastest average
growth of the four countries in that time, wound up with almost the same
relative amount of internal debt growth. France and Thailand, which have both
had economic struggles in the post-crisis period, took very different paths and
ended up at the bottom and top of the chart, respectively.
Here's why the comparison is worth digesting. Below is
the same exact chart, except with China added:
(Federal Reserve)
The enormity of the Chinese debt load makes the
differences between the other four nations practically vanish. Notice the scale
on the left side of the graph. Starting at a base of 100, the Chinese
measurement reached nearly 5,000 last year, or 50 times what it was in
2007.
There is likely no economist on the planet who would
advocate multiplying any significant category of debt 50 times over, no matter
what the reason. But this is as much the result of political pressure to hit
government GDP targets as anything else. To go back to Pettis, he explains the
Chinese view by saying that for Beijing, GDP is an input, whereas virtually
every other country understands it as an output. In other words, most nations
tabulate their economic activities and eventually spit out a number that is
recorded as GDP. Many arguments are fought over exactly how to go about that
calculation and what it means, but the basic premise is pretty much the same.
In China, the central government determines what GDP shall be for the quarter,
and then it's up to provincial and local officials to do whatever is necessary
to hit their numbers, regardless of the actual necessity or utility of the
projects. (Furthermore, if those officials can't even reach their goals by
incessantly building bridges to nowhere, they may simply lie
and claim success anyway.)
Local governments are forbidden from directly
borrowing money, so their administrators do what any local government
apparatchiks worth their salt around the world do when they need money they're
technically not supposed to have: They find a loophole and exploit it
relentlessly. In China's case, that means forming "independent"
corporations known as "Local Government Financing Vehicles," which
are somewhat-inexplicably allowed to be the equivalent of Clark Kent putting on
a pair of glasses to fool everyone into thinking that he's not Superman. The
LGFVs can borrow money that local governments can't. So that's what
they do. Especially when the alternative is to displease the Politburo.
As you might imagine, this type of policy-making does
not tend to result in more money allocated to things like expanding sick leave,
pension reform, parental leave, debt reduction or anything else that fails to
artificially goose GDP. Instead, funds are dumped into watermelon
museums that nobody needs and endless Skynet (they seriously
call it that) "internal security" cameras that people need even
less.
The ironic lack of social safety nets in an ostensibly
Communist country, combined with a seemingly unstoppable regime of compulsive
over-investment, has for many years resulted in the exact opposite of
what China needs — consumers have felt and still feel it necessary to have some
of the highest savings rates in the world, which means they aren't becoming a larger
part of the economy but rather a smaller part of it. Here's
a graph published by Reuters, which shows that private consumption as a share
of Chinese GDP has been falling for decades. A similar chart from the Reserve
Bank of Australia compares household consumption in China to other major Asian
economies:
(Reserve Bank of Australia)
All these factors, and likely many more, have recently
produced a series of announcements that, at least to some, were not much of a
surprise: "China's
economy may never overtake the U.S.," declared Business Insider.
"China
Quietly Abandons Goal of Overtaking U.S. Economy," opined Newsweek.
Nikkei chimed in that "China's
GDP is unlikely to surpass U.S. in next few decades."
"The next few decades" is probably generous.
The Chinese economy, if measured by anything remotely approaching the slightest
degree of accuracy, won't surpass America's because it can't. The
structural forces that have allowed it to grow at breakneck speed for half a
century are now the same forces preventing it from continuing to do so. Chinese
labor costs today are significantly
higher than costs for the same amount of labor in both its Asian neighbors
and Latin America, including Mexico, where manufacturing for the American
market is much more convenient despite the overhanging power of the cartels. In
fact, Mexico became the largest
overall U.S. trading partner in the first quarter of this year, after surpassing
China to become the biggest trade partner specifically for manufactured
goods last year.
The Chinese economy won't surpass America's
because it can't. The same structural forces that allowed it to grow
at breakneck speed for half a century are now preventing it from continuing to
do so.
China's "factory of the world" status is
slowly evaporating because cheaper workers can now be found elsewhere, which
often come without problems like blatant
IP theft across countless industries or figuring out whether any given
supply chain involves
Uyghur forced labor camps. The Chinese population is shrinking, meaning
that domestic labor costs will continue to surge upward even as overall GDP
growth falls. The government in Beijing is worried about "South
Park" and Winnie the Pooh. China is no longer a place where capitalist
dreams go to succeed, and indeed the fact that it ever was reflects one of the
biggest mistakes the Western world has made since the fall of the Iron Curtain.
President Xi Jinping probably won't be happy
with the way the rest of the "Chinese century" is likely to turn out.
If it's any consolation, he should be happier right now than he will be in the
years ahead.
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